Economics
Bond Price
Quick fact
A bond's price and its yield move in opposite directions: when the price goes down, the yield goes up, and vice versa. This is because the bond's fixed coupon payments become more or less attractive compared to new bonds issued at current rates.
Why this is interesting
You probably know that when interest rates go up, loans become more expensive. But did you know that the price of an existing bond actually drops when rates rise? Why would a bond that was paying a fixed amount suddenly be worth less?
Read the full explanation
Understanding Bond Price
Imagine you buy a bond that promises to pay you $50 every year for 10 years and then return $1,000 at the end. That $50 annual payment is the coupon. The bond's price is what you pay today to own that stream of future payments. If market interest rates are 5%, your bond's payments are exactly competitive, so its price will be around $1,000. But if rates suddenly rise to 6%, new bonds will pay $60 per year. Your bond's $50 payments become less attractive, so to sell it you would have to lower its price—say, to $926—so that a buyer's effective return matches the new market rate. Conversely, if rates fall to 4%, your bond's $50 payments look great, and its price will rise above $1,000. This inverse relationship is the core of bond pricing.
A deeper explanation
The price of a bond is the sum of the present values of all its future cash flows—each coupon payment and the face value at maturity—discounted at the current market interest rate (the yield to maturity). Mathematically, this is: Price = Σ (Coupon / (1+r)^t) + Face Value / (1+r)^N, where r is the market rate per period, t is the time period, and N is the total periods. As r increases, each denominator grows, reducing the present values and thus the price. This mechanism reflects the opportunity cost: investors demand a competitive return, so existing bonds must adjust in price to offer a comparable yield. The longer the bond's maturity and the lower its coupon, the more sensitive its price is to rate changes—a concept known as duration. Understanding bond price helps investors manage interest rate risk, decide when to buy or sell bonds, and grasp how central bank policy affects financial markets.