If market interest rates decrease from 7% to 6%, it will increase to the value of a $1,000 bond with a fixed interest rate.
A basic principle of bond investing is that market interest rates and bond prices generally move in opposite directions. When market interest rates rise, fixed-rate bond prices fall. This phenomenon is known as interest rate risk.
If the market interest rate is lower than the contract interest rate, the bond will be sold above its face value. This is because investors are willing to pay more for a bond that pays a higher contract rate than they would get for a similar bond (market rate).
Bond prices are inversely proportional to interest rates. This means that when interest rates rise, bond prices fall, and when interest rates fall, bond prices rise.
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