Changes

But if the interest rate is lower than 6%, the bond is worth more than $1000. For example, if the interest rate were '''zero...''' if the buyer was just as happy to get $1000 two years from now as to get it today... then the value of the bond would be just the total value of all of the future payments, or $1120. On the other hand, if the prevailing interest rate is higher than 6%, the value of the bond is less than its face value. For example, suppose the interest rate has risen to 12%, a rather large change. Why would a buyer pay $1000 to receive interest payments of $15 every quarter when he could buy a newly-issued 12% bond and receive interest payments of $30? The net present value calculation shows that the value of the bond is only $894.70.

But if the interest rate is lower than 6%, the bond is worth more than $1000. For example, if the interest rate were '''zero...''' if the buyer was just as happy to get $1000 two years from now as to get it today... then the value of the bond would be just the total value of all of the future payments, or $1120. On the other hand, if the prevailing interest rate is higher than 6%, the value of the bond is less than its face value. For example, suppose the interest rate has risen to 12%, a rather large change. Why would a buyer pay $1000 to receive interest payments of $15 every quarter when he could buy a newly-issued 12% bond and receive interest payments of $30? The net present value calculation shows that the value of the bond is only $894.70.

So, someone who buys the example bond and is forced to sell it before maturity could find that it was worth anywhere from about $900 to $1100.

So, someone who buys the example bond and sells it before maturity could find that it was worth anywhere from about $900 to $1100.<ref>Obviously, a bondholder who notices that interest rates have dropped and that their bond is worth more than its face value might well ''decide'' to sell it and take the profit.</ref>

Most personal investors will own bonds in bond-based mutual funds that hold hundreds of bonds, all maturing at different times. Since most of the bonds are not at their maturity, their market value is affected by changes in interest rates. A sharp rise in interest rates can even cause the value of the fund to drop for a while. Nevertheless, over time, as the bonds in the fund keep paying their interest payments and paying off their principal, the value of the fund tends to rise inexorably at about the average interest rate of the bonds it holds.  

Most personal investors will own bonds in bond-based mutual funds that hold hundreds of bonds, all maturing at different times. Since most of the bonds are not at their maturity, their market value is affected by changes in interest rates. A sharp rise in interest rates can even cause the value of the fund to drop for a while. Nevertheless, over time, as the bonds in the fund keep paying their interest payments and paying off their principal, the value of the fund tends to rise inexorably at about the average interest rate of the bonds it holds.