Bond Prices Explained

Bonds offer income and preservation of value on maturity. Between when a bond is issued and when the bond matures the market value of that bond will fluctuate daily. Why? Because interest rates fluctuate every day. An easy way to remember this is to think of a see-saw. When rates go up, bond prices fall. When rates go down, bond prices rise.

Think of it like this: Each day investors bring new money to the bond market for investing. Let's say a bond issued some time ago paid 6%. And let's assume that interest rates paid by similar bonds that are being issued today have risen to 7%. If both bonds were offered at $1,000 each, which one would you want to purchase? The 7% bond, of course, because it would pay you more income.

But what if the people who owned 6% bonds wanted to sell them? What would they have to do to persuade you to buy their bonds? They would have to lower the price of their bonds (discount it) until it became attractive to you. That's why the prices of already issued bonds go down when interest rates go up. And when interest rates fall, bond values go up because the higher interest they pay is more valuable. Bond prices always move in the opposite direction of interest rates.

Interest Rates

Bond Prices

Bond Prices

Bond Prices