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ProShares UltraPro Short 20+ Year Trs Message Board

  • jen.co44 jen.co44 Jan 3, 2013 11:18 PM Flag

    A very basic question:

    would one or more of you informed gentlemen please explain to me this concept that when interest rates rise bond prices drop? I'm sure this is very basic but I'm not a bond person

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    • Say overall interst rates are 5%. Say a particular $100 bond pays interest at a rate of $5.00 or 5%. Say overall interst rates rise to 7%. If you want to sell your bond the buyer will want to get at least 7% since that is what the overall marketr is paying. Your bond, though, is only paying $5.00. In order for the buyer to be interested in buying your bond they would only offer $71.42: 5.00/71.42=7% Thus as interest rates go up from 5% to 7% the value of the bond has gone down from $100 to $71.42 The reverse would happen if rates fall.

      Same example Bond is $100. paying a rate oft 5% overall rates at 5% also. overall rates drop to 3%. People will bid up your bond because it is now paying a rate above the going rate of 3%. 5.00/.03=$166.66 ; rates have gone down from 5% to 3% and bond value has gone up

      This is an obvious simplification. There are many other factors; maturity of the bond, risk of the particular bond, etc that will determine the actual value of the bond. It does, however, show the principals of higher rates bringing down the value of a bond and dropping rates increasing the value of a bond.

    • When people are selling bonds, interest rates rise, when they are buying bonds interest rates drop. That is why the Federal Reserve has its bond buying program. To keep rates low. But with the Debt ceiling deadline coming up, i think rates are going to rise, therefore TTT will rise. But i am not a bond expert.

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