Economics Bonds Questions Medium
The relationship between interest rates and bond prices is inverse or negative. When interest rates rise, the prices of existing bonds decrease, and when interest rates fall, the prices of existing bonds increase. This inverse relationship exists because when interest rates rise, newly issued bonds offer higher yields, making existing bonds with lower yields less attractive to investors. As a result, the prices of existing bonds must decrease to align with the higher yields available in the market. Conversely, when interest rates fall, newly issued bonds offer lower yields, making existing bonds with higher yields more desirable. Therefore, the prices of existing bonds increase to match the lower yields offered by new bonds. This inverse relationship between interest rates and bond prices is known as the interest rate risk.