How do bond prices change with interest rates?

When interest rates rise, the prices of existing bonds in the market tend to fall, and when interest rates fall, bond prices tend to rise. This relationship between bond prices and interest rates is known as the “interest rate risk” of bonds. The reason for this inverse relationship is that when interest rates rise, new bonds are issued with higher yields, which makes existing bonds with lower yields less attractive to investors. As a result, the price of existing bonds falls to make them more competitive with newly issued bonds. Conversely, when interest rates fall, new bonds are issued with lower yields, making existing bonds with higher yields more attractive to investors, and driving up their prices.

The effects of interest rates are often not directly felt but play out over a long time as valuations of real-estate and other assets adjust.

At Horizon65, we created a mobile app that enabled you to check the effect of high interest rates on your savings and to simulate potential investments that can defend against it.

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