Relationship between bond prices and interest rates | Finance & Capital Markets | Khan Academy

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Why bond prices move inversely to changes in interest rate. Created by Sal Khan.
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Finance and capital markets on Khan Academy: Both corporations and governments can borrow money by selling bonds. This tutorial explains how this works and how bond prices relate to interest rates. In general, understanding this not only helps you with your own investing, but gives you a lens on the entire global economy.
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[@Lofibootleg]

Hi, thank you so much for the video Sal! I would just like to add on in case anyone was struggling to make sense of the inverse relationship between interest rates and bond prices like I did. You can think of it as the following scenarios: 1) If interest rates in general fall, the bond's interest rates become more attractive, so people will bid up the price of the bond. 2) Likewise, if interest rates rise, people will no longer prefer the lower fixed interest rate paid by a bond, and their price will fall. Hope this helps :)

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Still don't get it

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[@vivek447]

Hi Derek, Can you please explain what do you mean by interest rate here?

[@ttfan3257]

Older bond will trade-at-discount-to-par ( ie older bond price falls) , when interest rates rise (for newer bonds) Older bond will trade-at-premium-to-par ( ie older bond price rises) , when interest rates fall (for newer bonds)

[@kingwoo1900]

So hypothetically does that means that we should buy bonds when the interest rate is the highest as one can profit from rising bond price when interest rate comes down ?

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I've slowly invested more into bond funds as central banks slowly cut interest rates since late 2018.

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Thank you so much! Was really helpful :)

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amazingly clear explanation. Thanks so much

[@madras61]

This was the best video that explains the relationship between Bond and interest rates in a simple term so that one can understand.❤

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THANK YOU. It took me over a half dozen videos to find this one that makes sense of this insanity. It shows the relationship in real numbers.

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Thank you so much for the explanation! Really helped me!

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Hands down the best explanation of bond price fluctuation with an excellent mathematical demonstration. Thank you so much.

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Super clear simple explanation in the most profound way.

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now the real question is where can i find that 15% coupon bond lol

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ANGL junk bond etf

[@dantheman4011]

I would even take 10%

[@ronniebine1325]

@@dantheman4011 I would even take 5% given that currently, the interest rate on 30 year US bond is 2.34% & 1.6% on a 10-year bond.

[@dantheman4011]

@@ronniebine1325 which barely covers inflation.

[@ronniebine1325]

@@dantheman4011 Inflation will shoot up soon as theres no chance that FED can reduce it's balance sheet. Gold is on the way to shoot to the moon.

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[@SAM1057368]

What a brilliant way of explaining the present value of a bond using discounted cash flows, without even introducing it as an NPV of a bond. This inductive reasoning is brilliant. PV of Zero Coupon Bonds= Bond's Price/(1+R) where R= Coupon Payments PV of Normal Bond= Bond's Coupon payments/ (1+R)^t +Bond's Principal/ (1+R)^t t= number of years Every time the interest rate, or discount rates, increase, the price of a bond, or its present value decreases. We also have to distinguish between: Current Yield= Annual Coupon Payments/Current Market Price of a Bond Yield to Maturity= [Cash-Flows + (F+P/Number of years to Maturity) / (F+P/2) where F: Face Value of a bond P= Market Price of a bond When the credit issuers are solvent and there's no or every small change of default, then there bonds' yields are lower while their prices are higher. This is because they will most likely pay their debt obligations. That's the reasons economically-weak countries like Greece, Spain, Portugal and Argentina offer very high yields on their bonds.

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Huh. Good explanation. Definitely found that helpful.

[@samuelspencer5047]

Thanks for the video. I believed that with interest rates going down it would want to drive bond holders from bonds and elsewhere due to the low yield, I guess it is true with bonds with variable rate.

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Sick calculator. Nicely explained aswell.

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Explained very well. Thank you.

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Quantitive easing makes sense now. Buying bonds increases their value thus bringing down the yield!

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[@torque1523]

If you're looking for his not math succinct explanation: When the interest rate goes up, people expect more return from the bonds which don’t give more because they were issued at a lower interest rate time therefore their price go down (trades at a discount to par). When the interest rates goes down, the bonds issued in the higher interest rate time yield above expectations to they go up in value (trading at a premium).

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Thanks for the video!

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Thanks for saving my life ❤

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Thank you so much:) I love that you have the subtitle in the video

[@ProfRoofs]

Who’s here after the drop in the market despite Feds saying interest rates would stay low until 2023?

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LOOOOOOOOOOOOOOOOL

[@yemisadiq8346]

Fed has a targeted interest rate and this is always in line with inflation. However, Fed cannot control the forces of demand and supply. Hence, real market activities would determine the actual interest rate.

[@nareshkoyalkar8370]

thank you so much sir,good explanation that i ever seen before

[@cesarb2679]

Great video! Thanks! Is there a place where you could see bond prices?

[@theunscriptedcouple5339]

This video is a gem!

[@giniwelle]

Amazingly well done.

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Beautiful explanation

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Thank you very much, very helpful ❤️

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Yes, it was amazing thanks!

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Finally my concepts are clear ✌️

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Simple , and accurate

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Thank you so much!!!

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i am happy

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Know what your thinking

[@eddyvideostar]

Shambhu Neupane: Yes, anything which is not too out of my control I am happy with my knowing this is not a chance game like the stock market, or worse, an individual stock. When you touch it, especially a rising market, there is no guarantee that it will do what you desire. Bonds are not a "greedy" vehicle. These are a nexus to the sound rewards it provides.

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Sal, awesome video.

[@pashuku]

Perfect. Thanks

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Wow 🤩 I understand. Good explanation. Took two times though 🤯

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Can you do one on student loans? Including graduate/medical/law school loans? Thank you so much for these!!!

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I second this!

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Finally, I get it! Thanks!

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i have an exam in acct intermediate 2 tomorrow and i think this video just saved me LOL thank u Sal

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Very good and easy explanation. Cheers.

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Very lucidly described.. thanks.

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I just the way u explained… simple terms n clearly …

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Thank you sir!