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Why do bond prices fall when yields rise?

Bond prices fall when market yields rise because an existing bond's fixed cash flows become less attractive relative to newly available bonds. Its price must decline until the return available to a new buyer is competitive with prevailing yields.

SHORT ANSWER

The core idea

Bond prices fall when market yields rise because an existing bond's fixed cash flows become less attractive relative to newly available bonds. Its price must decline until the return available to a new buyer is competitive with prevailing yields.

THE MECHANISM

What is happening underneath

Suppose a bond pays a fixed $50 annual coupon. If comparable new bonds begin offering higher returns, investors will not normally pay the same price for the old $50 cash flow. A lower purchase price raises the old bond's effective yield.

MARKET INTERPRETATION

How investors should read it

Duration indicates how sensitive the price is likely to be. Longer-duration bonds generally experience larger percentage price changes for the same movement in yield.

BONDSTATS TAKEAWAY

The same market move can carry different information depending on which maturity, issuer and risk premium is changing. Read the question together with the underlying concepts rather than treating one price move as a universal signal.

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