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Why do bond prices rise when yields fall?

When market yields fall, the fixed cash flows of an existing bond become relatively more attractive. Investors can therefore pay a higher price for those cash flows while still earning a return consistent with the lower market yield.

SHORT ANSWER

The core idea

When market yields fall, the fixed cash flows of an existing bond become relatively more attractive. Investors can therefore pay a higher price for those cash flows while still earning a return consistent with the lower market yield.

THE MECHANISM

What is happening underneath

A bond with a coupon set when rates were higher may offer more income than newly issued comparable bonds. Competition for that income can lift its price above par.

MARKET INTERPRETATION

How investors should read it

The effect is generally larger for bonds with greater duration because more of their value depends on cash flows received further in the future.

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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