Why do bond prices fall when interest rates rise?
The most basic fixed-income relationship, explained intuitively.
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A bond's coupons are fixed. When market rates rise, new bonds pay more, so an existing bond with a lower coupon is less attractive — its price must fall until its yield matches the market. Mathematically, the price is the present value of fixed cash flows, and a higher discount rate means a lower present value. The longer the bond, the bigger the effect.
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Example
A 10-year bond with a 4% coupon trades at 100 when yields are 4%. If yields rise to 5%, the price falls to about 92.3, because the 4% coupons are now discounted at 5%.
Rules of thumb
- Price and yield move inversely.
- Longer maturity → larger price change (higher duration).
- Lower coupon → larger price change (more of the value is in the distant final payment).
- The relationship is curved (convex): prices rise more when yields fall than they drop when yields rise by the same amount.
What to buy if you expect rates to fall
Long-duration bonds — long maturities, low or zero coupons — gain the most.
Mistakes to avoid
Explaining with "demand falls" only, without the present-value logic.
Follow-ups they may ask
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