How are bond prices affected by changes in interest rates?

How are bond prices affected by changes in interest rates?

Bond prices are inversely related to changes in interest rates. When interest rates rise, the prices of existing bonds decrease, and when interest rates fall, bond prices increase. This relationship exists because when interest rates rise, newly issued bonds offer higher coupon rates, making existing bonds with lower coupon rates less attractive to investors. As a result, the demand for existing bonds decreases, causing their prices to decline. Conversely, when interest rates fall, newly issued bonds offer lower coupon rates, making existing bonds with higher coupon rates more desirable. This increased demand for existing bonds drives their prices up. Therefore, bond prices and interest rates have an inverse relationship.