The relationship between bond prices and interest rates is inverse: when interest rates rise, bond prices typically fall, and vice versa. This occurs because bonds pay fixed interest (coupon) payments, making their value sensitive to changes in market interest rates. When new bonds are issued with higher yields due to rising interest rates, existing bonds with lower coupon rates become less attractive, causing their prices to drop to match the new market yield. Conversely, when interest rates decline, existing bonds with higher fixed coupons become more valuable, pushing their prices up.

This inverse relationship is fundamental to bond investing and is explained by the concept of present value—future cash flows (coupons and principal) are discounted at current market rates. Higher discount rates (interest rates) reduce the present value of these cash flows, lowering the bond’s price. Investors also monitor duration, a measure of a bond’s sensitivity to interest rate changes; longer-duration bonds experience greater price fluctuations. Central bank policies, inflation expectations, and economic growth heavily influence this dynamic, making it crucial for investors to assess interest rate trends when trading bonds.