prices of existing bonds move______as market interest rates move_______.
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The prices of existing bonds move inversely, or in the opposite direction, as market interest rates move. When market interest rates rise, the prices of existing bonds typically decline, and when market interest rates fall, the prices of existing bonds generally rise.
To understand why this happens, it is important to know that bonds have fixed interest rates or coupon rates when they are issued. These interest rates are determined by the prevailing market interest rates at the time of issuance.
When market interest rates rise above the coupon rate of a bond, newly issued bonds will offer higher coupon rates to attract investors. This makes existing bonds with lower coupon rates less attractive, leading to a decrease in their prices. Investors are willing to pay less for a bond with a lower coupon rate compared to newly issued bonds with higher rates of interest.
Conversely, when market interest rates fall below the coupon rate of a bond, newly issued bonds will offer lower coupon rates. This makes existing bonds with higher coupon rates more attractive, causing their prices to increase. Investors are willing to pay more for a bond with a higher coupon rate compared to newly issued bonds with lower rates of interest.
Overall, the relationship between bond prices and market interest rates is inverse. When interest rates go up, bond prices go down, and when interest rates go down, bond prices go up. Understanding this relationship can help individuals and investors make informed decisions when dealing with bonds and interest rate fluctuations.