Imagine investing your hard-earned money in a bond, only to watch its value decrease as interest rates soar. This complicated dance between bond prices and interest rates is a fascinating yet often puzzling phenomenon that leaves many investors scratching their heads. In the world of finance, this reverse relationship holds a key to understanding the complex dynamics at play in the market. So the question is, why does the value of your bond decrease when interest rates increase?

When interest rates increase, newly issued bonds offer higher yields to investors. This makes existing bonds with lower yields less attractive in comparison.

Therefore, the value of older bonds decreases in order to adjust for this difference in yield. Investors are willing to pay less for an existing bond with a lower interest rate because they could get better returns by purchasing a new bond with a higher interest rate.

Bond prices are determined by a variety of factors, including interest rates, credit risk, and time to maturity. When interest rates rise, bond prices typically fall, and vice versa. This is because existing bonds with lower interest rates become less attractive in comparison to newly issued bonds with higher rates.

Credit risk also affects bond prices; bonds issued by entities with lower credit ratings will generally have lower prices to compensate investors for the higher risk.