Economics Bonds Questions Medium
The relationship between bond prices and market interest rates is inverse or negative. When market interest rates rise, the prices of existing bonds decrease, and when market interest rates fall, the prices of existing bonds increase. This inverse relationship exists because when market 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 prices of existing bonds must decrease to provide a similar yield to the newly issued bonds. Conversely, when market interest rates fall, existing bonds with higher coupon rates become more desirable, leading to an increase in their prices to align with the lower prevailing interest rates.