Bond Rate, refers to Coupon Rate or the rate of interest that is paid by a company to an investor, when upon buying the bonds issued by that company in the Bond Markets, the investor offers a loan to the commercial organization which enables it to pay off prior debts or finance current needs.
The
Bond Rate is always inversely proportional to the Prices of Bonds, as a rule. Mainly this happens because commonly Bonds are issued for a fixed time period (the completion of which is termed as Maturity) with a fixed Bond Rate (Coupon Rate). But after some time has passed, the Bond Rate that is offered by the company issuing the Bonds, usually develops a difference with the rates of interest being offered in the financial markets. Therefore, the Bond Rate lags behind the rates of interest offered in the financial markets. This is the main reason which in fact turns people away from buying the Bonds which were issued earlier, in the Secondary Bond Markets.
Under these circumstances, those who are eager to sell off the Bonds owned by them are faced with immense difficulties, for the difference in the Bond Rate attached with the Bonds and the current rates of interest in the capital markets.The only thing left for them to do is to sell off the Bonds owned by them, below the face value, at such a price which in fact will make the Bond Rate earned by the Bonds equal to the rates offered in the financial markets, in the case of the potential customer who will buy the Bonds.The lower (in comparison with the face value of the Bonds which are to be sold) investment made by the potential consumer will bring in the interests which will be at par with that offered
in the financial markets, and only under such circumstances will the potential buyer come forward to buy bonds issued earlier.
However, when the current rates offered in the financial markets are lower in comparison with the Bond Rate that is offered along with the bonds issued earlier, the owners are able to sell off their bonds at a premium, that is, higher than the face value.
Therefore, as said above Bond Rate, as a rule, always remains inversely proportional to the Bond Prices.