Bond Pricing and Interest Rates

The price of a bond is responsive to prevailing interest rates in the market. This means that an increase in interest rates lowers the price of a bond and vice versa. This occurs because newly sold bonds issued at a higher rate of interest will offer more attractive yields as compared to those with lower rates of interest and therefore will be less in demand. Individuals may sell those existing bonds at a discount to bring the price down to where it is in line with this new market rate. Conversely, if interest rates decline, existing bonds with higher coupon rates become more attractive, which would boost bond prices. Bonds are sold in secondary markets and their price is susceptible to variations based on forces of demand and supply, expected interest rates, and rating of the issuer.