If you own a bond with a coupon rate of 5% and a yield of 5% and it has a maturity date of 01 december 10/15, what happens if the general market interest rate rises from 5% up to 10%?
When interest rates rise, bond prices fall, and the yields rise. you are now holding a bond that pays a coupon rate of 5% and would probably like to free up that money in order to invest in something that pays 10%. You would likely allow the bond to expire in 2010 rather than extend it to 2015. so the bond is treated as a short term rather than long-term bond. If you own a bond with a coupon rate of 5% and a yield of 5% and it has a maturity date of 01 december 10/15, what happens if the general market interest rate falls from 5% down to 2%?
When interest rates fall, bond prices rise, and the yields fall. You are now holding a bond that pays a coupon rate of 5% and would probably like to receive that 5% coupon payment for a long time to come. You would likely extend the bond so it matures in 2015 rather than let the bond mature in 2010. so the bond is treated as a long term rather than short-term bond.
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