When you buy a bond, either directly or through a mutual fund, you're lending money to the bond's issuer, who promises to pay you back the principal or par value when the loan is due on the bond's maturity date. In the meantime, the issuer also promises to pay you periodic interest payments to compensate you for the use of your money. The rate at which the issuer pays you—the bond's stated interest rate or coupon rate—is generally fixed at issuance.

An inverse relationship When new bonds are issued, they typically carry coupon rates at or close to the prevailing market interest rate. Interest rates and bond prices have an inverse relationship; so when one goes up, the other goes down.

How does the prevailing market interest rate affect the value of a bond you already own or a bond you want to buy from or sell to someone else?

The answer lies in the concept of opportunity cost. Investors constantly compare the returns on their current investments to what they could get elsewhere in the market. As market interest rates change, a bond's coupon rate—which, remember, is fixed—becomes more or less attractive to investors, who are therefore willing to pay more or less for the bond itself. Let's look at an example.

After evaluating your investment alternatives, you decide this is a good deal, so you purchase a bond at its par value: What if rates go up? Now let's suppose that later that year, interest rates in general go up. What if rates fall? It would be priced at a premium, since it would be carrying a higher interest rate than what was currently available on the market.

Of course, many other factors go into determining the attractiveness of a particular bond: But the important thing to remember is that change occurs in market interest rates virtually every day. The movement of bond prices and bond yields is simply a reaction to that change.

The illustration is approximate and is not intended to represent the return of any particular bond or bond fund. Bond values fluctuate in response to the financial condition of individual issuers, changes in interest rates, and general market and economic conditions. Stock values fluctuate in response to the activities of individual companies and general market and economic conditions. Bond values fluctuate in response to the financial condition of individual issuers, general market and economic conditions, and changes in interest rates.

Changes in market conditions and government policies may lead to periods of heightened volatility in the bond market and reduced liquidity for certain bonds held by the fund. In general, when interest rates rise, bond values fall and investors may lose principal value. Interest-rate changes and their impact on the fund and its share price can be sudden and unpredictable. Consult a fund's prospectus for additional information on these and other risks.

The Price Correlation Between Stocks And Bonds - sanapidyqel.web.fc2.com

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Bond market - Wikipedia

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The Relationship Between Bonds and Interest Rates- Wells Fargo Funds

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Beginning of content The Relationship Between Bonds and Interest Rates When you buy a bond, either directly or through a mutual fund, you're lending money to the bond's issuer, who promises to pay you back the principal or par value when the loan is due on the bond's maturity date.

Open an Account Visit WellsTrade Call Some benefits of mutual funds Choosing a fund to meet your needs The importance of portfolio diversification Understanding asset classes The power of compounding Bonds and interest rates. NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE.