When interest rates fall, existing bonds with higher yields become more valuable, causing their prices to rise and yields to decrease; conversely, when interest rates rise, existing bonds with lower yields become less attractive, causing their prices to fall and yields to increase.
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Money Mindset: Impact of Interest Rate Changes on Bond ValueAdded:
If an investor has a bond that has a yield of 5% but interest rates in the economy are dropping overall, let's say the central banks have taken them down considerably, well, that 5% bond is going to be worth an awful lot more to investors. So, the price is going to go up and the yield of that bond will go down. Conversely, if interest rates go up, well, perhaps that 5% number isn't as attractive as it once looked, which means the yield has to go up and the price has to go [music] down.
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