If you’ve paid attention to financial news, you would have read/seen headlines such as:
“Interest rates up, bonds prices fall.”
The relationship between interest rates and bond prices is an inverse one. When interest rates increase, bond prices fall and when interest rates fall, bond prices increase. But why is that? It’s kind of like when the latest phone model launches in the market. It has all these new features that an older phone in the same series does not have. So, anyone who is looking to buy a phone will consider the newer model with the newer features even if the price of this new model is higher than that of the older model. This is because the benefits that the phone user will derive from using the new model will be more than the old phone. In the case of bonds, these benefits are the returns or the interest. Let’s explore this further.
