Inverse Relationship between changes in Interest Rates and Bond Prices

When interest rates rise, bond prices decline. When interest rates fall, bond prices rise. Higher
interest rates depress the bond’s current value. You are discounting the future payments at a higher
rate, which decrease their current value. Lower interest rates increase a bond’s current value. You are
discounting the future payments at a lower rate, which increase their value.

Current Interest Rate Bond Prices

12% $774
11 823
10 877
9 936
8 1,000
7 1,070
6 1,147
5 1,232

Although all bonds exhibit this price volatility, the price fluctuations of bonds with longer terms
to maturity tend to have greater price fluctuations than the bonds with shorter terms to maturity. You
may see this relationship by comparing the impact of changes in interest rates on the prices of two
bonds with different terms to maturity.

Current Interest Rate Price of the 10-year Bond Price of the 20-year Bond

12% $774 $701

11 823 761
10 877 830
9 936 909
8 1,000 1000
7 1,070 1,106
6 1,147 1,229
5 1,232 1,374

In both cases, higher interest rates cause the bond to sell for a discount, but the price decline is
greater for the bond that matures after 20 years. And lower interest rates cause the price of the 20-year
bond to sell for greater premium.