What happens to a bond's price when interest rates rise?

When interest rates rise, the price of existing bonds typically decreases. This relationship exists because new bonds are issued at the higher interest rates, making them more attractive to investors compared to existing bonds that pay lower interest rates. As a result, the market value of the existing bonds declines to adjust for this difference in yield. Investors demand a discount on these older bonds in order to align their return with the new, higher yielding options available in the market. This fundamental principle of bond pricing is rooted in the concept of opportunity cost; if investors can get a better return elsewhere, the current bond must decrease in price to encourage buyers. Thus, when interest rates go up, the bond's price will fall accordingly.