Term Structure of Interest Rate

Question 1

what does the price of a bond equal?

Answer 1

Recall that price of a bond equals the sum of discounted future cash flows

Question 2

what happens to the price of a bond when interest rates rise?

Answer 2

Price of a bond drops when interest rate rises, and vice versa.

Why? Because fixed cash flow in the future is worth less today when interest rate is higher!

Interest rate is inversely related to the value of future cash flows.