How do interest rates affect bond prices?

How do interest rates affect bond prices?

Interest rates and bond prices have an inverse relationship. When interest rates rise, bond prices typically fall.

Why does this happen?

When interest rates increase, new bonds are issued with higher yields, making existing bonds with lower yields less attractive.

What happens to long-term bonds compared to short-term bonds?

Long-term bonds are generally more sensitive to interest rate changes than short-term bonds, leading to greater price fluctuations.

Can you give me an example?

Sure! If a 10-year bond pays 3% and rates rise to 4%, the bond's price will drop to offer a competitive yield.

What strategies can investors use to manage interest rate risk?

Investors can diversify their bond portfolio, consider bond ladders, or invest in floating-rate bonds to manage interest rate risk.