This paper provides answers to four questions pertaining to financial investment. It looks at discussions surrounding the relationships between bond prices and interest rates. Other key concepts analyzed include nominal interest rate, real interest rate, and rate of inflation. The paper also provides an examination into the reasons why inflationary expectations can cause nominal interest rates to rise.
From the Paper:
"Is it correct to say that bond prices vary inversely with the interest rate because of simple mathematics? Why? In order to address this question appropriately, one must first define bonds. A bond is a debt security that is representative an obligation of the issuer to pay interest to the creditor (i.e. bond holder) and return the principal at maturity (Letting Off 1). Bonds that are backed by collateral are secured, while those that are not secured are called debentures (Letting Off 1). The issuer of a sinking fund bond is obliged to set aside some of its earnings to retire bonds. A bond is typically identified by maturity date and coupon rate. The coupon rate is the interest rate that is stated on the bond (Letting Off 1)."
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