Question

Explain why the bond price and bond interest rate are usually negatively related to each other.

Answer 1

Bonds and interest rates: an inverse relationship. All else being equal, if new bonds are issued with a higher interest rate than those currently on the market, the price of existing bonds will decline as demand for those bonds falls.

Most bonds pay a fixed interest rate that becomes more attractive if interest rates fall as there will be more investor demand that will drive up the price of the bond. Conversely, if interest rates rise, investors will no longer prefer the lower fixed interest rate paid by a bond resulting in a decline in the price of the bond.