Why it matters
A fixed future payment has a different present value when the required discount rate changes. This is why a bond can fluctuate in price even without a missed payment.
A worked example
A promised £100 payment in one year is worth about £95.24 at a 5% discount rate, or £90.91 at 10%, assuming payment occurs as promised.
Illustrative example · simplified assumptionsA common mistake
Assuming a bond’s market price can never fall.
Where the idea needs care
Credit risk, maturity, optionality and changing cash flows complicate actual bonds.
Apply the idea
Explain this concept using a different example from your spending, work, business or a policy debate. State what stays fixed and what could change the result.
Sources and further study
Examples and explanations by Alibomics. Numeric illustrations are not current market quotations.