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Mind and markets

Lesson 98 · Written for kid, teen, and little

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. 💵

A

Words to know

5

Bond

A loan to a company or government with promised repayment terms. For example, a $1,000 face-value bond may promise that principal at maturity; default is possible.

Interest rate

The extra amount a borrower pays for using your money, usually written as a percent. 5% on $1,000 is $50 a year.

Coupon

A fixed-rate bond promises a specified interest payment. A hypothetical $50 annual coupon stays $50 when market rates change, provided the issuer pays.

Face value

The principal amount a bond promises to repay at maturity. Actual repayment depends on the issuer meeting its obligation.

Yield

How much a bond pays each year compared with the price you pay for it. A $50 coupon on a bond bought for $1,000 is a 5% yield; buy it for $900 and the yield is about 5.6%.

Try it — no accountTrue or false

Swipe true or false about bonds and rates.

Card 1 of 4

A bond is a loan you make to a company or a government.

Swipe the card — or tap.

In the full lesson

  1. 1True or false
  2. 2Work out the number
  3. 3Make the call

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