If you remember one thing about bonds, make it this: price and yield move in opposite directions. When interest rates rise, the prices of existing bonds fall. It feels backwards at first, but the logic is simple.
Why they move opposite ways
A bond’s coupon is fixed. So when the market changes, the only thing that can adjust is the price.
Imagine you own a $1,000 bond paying a 5% coupon ($50 a year). Now suppose new bonds are issued paying 6% ($60 a year). Nobody will pay you $1,000 for your $50-a-year bond when they could get $60 a year elsewhere. So your bond’s price drops — to around $900 — until its yield ($50 on $900 ≈ 5.6%, plus the gain to maturity) matches the new 6% going rate.
The reverse is just as true: if new bonds only pay 4%, your 5% bond is suddenly attractive, and its price rises above $1,000.
Rates up → existing bond prices down. Rates down → existing bond prices up.
The intuition
A bond is a stream of fixed payments. When the “going rate” for money rises, those fixed payments are worth less today — so the price falls. When the going rate falls, the same fixed payments are worth more — so the price rises. The coupon can’t move, so the price does all the adjusting.
Why it matters
This is the source of a bond’s main risk. “Safe” government bonds can still lose value if you have to sell after rates have risen — even though the issuer never missed a payment. How much the price moves for a given rate change is the subject of the next lesson.
The takeaway
Bond prices and yields move inversely. Because the coupon is fixed, a change in market rates is absorbed entirely by the price — up when rates fall, down when rates rise. It’s the engine behind everything else in bonds.