why the bond prices fall whenever interest rates go up?????

is this something you have to answer in your homework?
bond prices and interest rate are on an inverse curve. price being on the x-xis.
you have a fixed interest rate for your bonds, say 5%. if the interest rate goes up to 7%, then why would anyone buy a bond which pays less interest than what the market is offering (7%)
to make your bond more enticing, you lower the price to make it at par with the current interest rate dividend

hope that helps....

bonds are just another tool to keep a check on inflation. when government sees that they need to take money out of economy, they raise the bond interest. which results in investors investing more in bonds as it gives higher return. money is take out of the economy and inflation decreases (at least ideally). and when gov. want to inject money in the economy they buy back the bonds. money gets into investors hands and they spend it in different venues. economy gets boost and more money means higher inflation which means higher prices.

hope this explained things a little bit.

That's a very monetarist view there sobank. I tend to be more fiscal in my view. i.e. a govt issues bonds to literally "borrow" money from its own people to finance a deficit. There are of course international bonds as well. China has many US treasury bonds for example. That whole arguement about China financing the US trade deficit. All in all, everything balances out at an instant of time.

thanks alot all of you guys for wonderful answer. it wasn't a homework question. i was just trying to understand fundamentals of bonds trading.


pakipatriot

does it mean that the bonds interest is always higher than the normal interest offers by the banks to attract investers??????


thanks again

i dont think there's anything that's an "always"
if the central bank is trying to encourage investment, it might reduce the interest rate (by buying back bonds), and put in cash into the economy. in this case, your bond had a locked-in 5% interest rate, and now the market rate is 2% Now, since your bond pays more than the market rate, everyone is willing to pay a higher price for your bond. the opposite of what i described in the other post.

Completely agree to the above statement. Here people are taking about T-bonds in the above post whcih are issued by central banks but companies also issue bonds. The bond price of a private company is always analyzed with the return rate on the T-bond. T-bonds are the safest and are usually bit higher than the prevailing interest rates and you will only buy private company bonds if the risk is not that much high as compare to return in comparision to T-bonds.