Equity Blue

The first part of the series on Bond Valuation included the effects of creditworthiness of the issuer on the pricing of a bond. Let us now review how market interest rates influence the bond prices. Generally, market interest rates do have a bigger impact on bonds of the “risk free” category, i.e. government bonds of countries with the highest investment grade ratings. These are, for example, the United States of America, Germany, the United Kingdom, Japan, and so on. The generic rule says that increasing market interest rates do cause the prices of bonds to decrease, i.e. their yield to maturity is growing, and vice versa: decreasing market interests are causing increasing prices of bonds, i.e. their yield to maturity is decreasing. It is therefore obvious that the yield to maturity tends to correlate with the market interest rates. The correlation is obvious throughout the whole time range, i.e. the yield to maturity of a two year bond tends to be in line with two year market rat