Interest rates refer to the cost of borrowing money. They are typically expressed as a percentage of the amount borrowed and are determined by the lender, such as a bank or government. Interest rates can vary depending on the type of loan, the creditworthiness of the borrower, and the current economic climate.
The relationship between interest rates and bond prices is inverse. When interest rates rise, bond prices fall, and vice versa. This is because when interest rates increase, new bonds issued with higher yields become more attractive to investors, making existing bonds with lower yields less valuable. Conversely, when interest rates fall, new bonds with lower yields become less attractive, making existing bonds with higher yields more valuable.
It is important to note that changes in interest rates can have a significant impact on the value of a bond portfolio, especially for bondholders who plan to hold their bonds until maturity. In general, bondholders who plan to hold their bonds to maturity will not be affected by changes in interest rates, as they will receive the full face value of their bond at maturity. However, bondholders who plan to sell their bonds before Maturity may experience price fluctuations due to changes in interest rates.
In summary, interest rates are the cost of borrowing money and are determined by the lender. The relationship between interest rates and bond prices is inverse, bondholders should be aware of this relationship and factor it into their investment decisions.