Why Bond Prices Fall When Rates Rise
See why an older bond gets cheaper once new bonds start paying more.
The idea
A bond is a loan you make to a company or a government, and it usually pays you a fixed amount of interest each year. If interest rates rise, brand-new bonds pay more, so your older lower-paying bond looks less attractive and buyers will generally only take it at a lower price. If rates fall, the opposite tends to happen, and older higher-paying bonds become more appealing. That see-saw is why bond prices and interest rates usually move in opposite directions. 💵
Words to know
- Bond
- A loan you give to a company or government. They pay you interest, then pay your money back later.
- Interest rate
- The extra amount a borrower pays for using your money, usually written as a percent.
- Coupon
- The fixed payment a bond gives you each year. It does not change when rates change.
- Face value
- The amount a bond pays back at the end, often $1,000.
- Yield
- How much a bond pays each year compared with the price you pay for it.
Try it — no account needed
Swipe true or false about bonds and rates.
A bond is a loan you make to a company or a government.
In the full lesson
- 1True or false
- 2Work out the number
- 3Make the call
Vine has 107 lessons like this one, each written three ways so a 7-year-old and a 17-year-old both get a version that fits.
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