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My understanding is that as interest rates go up, the yield offered by bonds also increases (in response).

If the yield of bond increases, then why are people selling bonds?

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Bond prices and interest rates have an inverse relationship. When rates increase, bond price declines, and vice versa.

Suppose you bought a bond with a rate of 4%. At a later date, interest rates have increased and now, a bond of the same credit quality and type is issued with an interest rate of 6%. Why would anyone buy the 4% bond instead of the 6% bond? Therefore, the price of the 4% bond is reduced until it yields 6%.

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  • Thank you. So, just to be clear, is it correct to say that the impact of interest rates on bonds is first on bond prices and then on the bond yield. For some reason I had this the other way around: interest rates impact bond yields and then bond prices. Apr 23, 2022 at 3:14
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    Technically, the impact comes from buying or selling of the bond. Let's put this in terms of yield. If a $1,000 bond pays $40 a year, the yield is 4%. If the bond drops to $800, someone purchasing it at that price receives a 5% yield (40/800). Apr 23, 2022 at 3:26
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    Ok. Thanks again. So a change in interest rates -> impacts demand/supply for the bond -> impacts bond price (which by construction then alters the bond's yield). Would this formulation make sense? Apr 23, 2022 at 3:31
  • Yep, you got it. Apr 23, 2022 at 16:33
  • Just to clarify: the face value of the 4% bond will stay the same, the coupons will still be 4% of the same face value annually and the issuer still owes the same face value to the bond holder at maturity. The only thing that changed is the market value of the bond: how much other investors would be willing to pay if you were to sell the bond. The yield is just a number you calculate to describe how much bang for your buck you're getting at given market price. (Someone correct me if I'm wrong.) May 30, 2022 at 20:39

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