Why Prices and Yields Move Opposite

When interest rates rise, existing bonds fall in price, and when rates fall, they rise. It is the single most important idea in bond investing. Here is why it happens, with real numbers.

The seesaw

Imagine you own a bond paying 4% a year. Then new bonds start paying 5%. Nobody will pay full price for your 4% bond when they can get 5% elsewhere, so its price drops until its yield to a new buyer matches the market. When rates fall, the opposite happens: your higher coupon becomes more valuable and the price rises.

Rates and prices move in opposite directions.

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