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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Kahn helped me back in high school; now he’s helping me navigate the markets. Can’t get rid of this guy.

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Haha, great comment!

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@@A2Cap By nassy do you mean Nasdaq? Yeah I agree things might not be the best right now. But just like you can sail into the wind, I would suppose that bear markets can present their own opportunities…

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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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thanks!

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Thank you

[@AllYouWantAndMore]

Still don't get it

[@JasonBong123]

This cleared it up for me. Thanks for the finishing touch kind sir!

[@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 ?

[@vlad_shark]

@@kingwoo1900 Exactly. I think like in this way too

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Great teacher, thank you for contributing !

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Best explanation available! Thanks a ton!

[@ethicsessay1120]

Very well explained, what could take someone hours in the library to understand, you do that in 13 minutes, thank you very much.

[@Rendog2]

Finally somebody's able to put it in language I understand. Thanks!

[@catsmith7084]

Love it ! Finally now i get it ... also watched bonds explained . I have no finance education backgroud but i am now in the mortgage industry and i can definitely benefit from this !

[@nagasako7]

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

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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 very much. This video helped me to get the understanding of Keynes' Speculative demand theory of money.

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Exactly the kind of lesson I was looking for. Thank you.

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amazingly clear explanation. Thanks so much

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Thanks a lot for making this one! Just in time too, got stuck on my financing course and you pop up some videos.

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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.

[@ir9000]

I loved your explanation. This made sense to me.

[@elvismark5172]

The Federal Reserve's intention to raise interest rates until inflation is under control is still viewed with skepticism by the markets, even if bond yields are rising while stock prices are falling. What is the best approach to profit from the current down market while I'm still considering whether to sell the $401,000 worth of stocks I own?

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[@jainamturakhia4688]

Thank you so much! Was really helpful :)

[@zeytee]

The best video you can find on KZbin about the relationship between interest rates and bond prices.

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This explanation is a God sent explanation. Well done!

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This is REALLY applying to what’s happing today. Glad it showed up on my KZbin feed.

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Each time I see you, I get light from your eyes.

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Super clear simple explanation in the most profound way.

[@thereversepolarbear]

That was really useful thanks. I understood it before, but this was so clear and concrete.

[@jeremyfreetoroam]

Thanks for the great video and I'm glad you showed the math.

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and free

[@ThinhSan]

Simple and straightforward explanation, thanks.

[@diaojun161]

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

[@morwinmanju]

Sal u are doing a great and appreciable job...

[@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.

[@ananyaimtiazhussain6816]

Wonderful explanation. Thank you so much for this.

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Is this the smartest guy alive ? How does he know every concept

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Julian Hilgemann textbooks + genetics + will

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@Donald Borum is that hard

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@@ITALIANO0110 obviously! Extremely difficult. Also, requires a lot of hard work.

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He was a Portfolio Manager at a hedge fund

[@danthemann6565]

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

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Thank you so much Sir for this explanation. You are helping alot of people out here.

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Thanks Sejal! That tought me in 12min. what would have taken hours to learn in finance textbook research.

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Perfect explanation! Thank you

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[@PunmasterSTP]

Bond prices and interest rates? More like "Better and profound information that's great!" Thanks for everything you do Sal.

[@user-ht7gw9ww1c]

나도 미국에서 수년가 칸아카데미 이용했던 사람으로서 이 칸 선생님응 진짜 존경한다. 미국은 달라... 이분은 공짜 무료 로 이런거 갈키는데 거의 창시자임... 미국이어서 가능 한국에서는 절대 불가능... 대학교육만 봐도 미국대학 근처에 한국처럼 술집 번화가 자체가 생겨날수 없음 그냥 닥치고 아닥하고 공부 ... 기본적으로 전문대 강사라도 해도 미국에서의 교육에대한 자부심이 쩔고 .. 내대학의 경우도 통계교수가 얘기했던게 우리가 미국에서 티칭 스킬이 10위권이다 올해는 14위로 내려갔다 이러면서 점수를 안주려고 하지만 학점에 관계없이 어려워도 이런 교수들 만나 의미있는 교육 받고 공부했다는거에 자부심이 든다. 이 칸 선생님때문에 인도사람들이 더욱 친근해지고 조아졌었징 똑똑합니다 진짜 수학 25구구단이었던가 25진법인가 까지 외우는 나라. 한국은 진짜 달라져야돼 자기 밥그릇만 챙기면 더이상 미래가 없음. 공무원 마니 뽑지 말고 중소기업 마니 뽑아요

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It helped sir. I was stuck in economics for 3 constant days. Thanks.

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Brilliance man. Really thank you ❤️

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This was good. The examples were awesome. Thank you

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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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This is perfect. Thanks!

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Thank you so much!!!

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Thank you, super helpful!

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Beautiful!!🙌🏾

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Sick calculator. Nicely explained aswell.

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Sal, awesome video.

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Boom! Thanks. I now know more about economics than Janet Yellen!

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Simple , and accurate

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

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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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This video is a gem!

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Yes, it was amazing thanks!

[@SejalPatelDrSej]

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.

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@@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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Very good and easy explanation. Cheers.

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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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Amazingly well done.

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Beautiful explanation

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Very lucidly described.. thanks.

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Well explained here, i now understand better

[@johnholme783]

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

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Thank you very much, very helpful ❤️

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I like the way you think, this makes a lot of sense to me

[@pashuku]

Perfect. Thanks

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[@holmeskapentanagarry491]

Thanks so much for the video. Is there any connection between bond yields and interest rate setting behavior of reserve banks?

[@luckyluke6919]

When the fed rise rates, treasury bonds also rise. Since they are less risky the company needs to rise his own rates to remain attractive. If both (treasury and company ) pays the same. Nobody is going to take extra risk for same return.

[@madhavishukla9816]

Finally my concepts are clear ✌️

[@craigscott2315]

not sure about helpful in regard to what the price is at the two year mark, but definitely explains the math needed to calculate the reasoning which is what is was wanting to know. Cheers.

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It is so understanding lesson and I liked as well.Thank you

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Explained very well. Thank you.

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Great video!

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thank you so much for this one

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Great explanation !

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Finally, I get it! Thanks!

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Thank you sir!

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I have to think very hard to understand the relationship between interest rate and bond prices. Thank you very much.

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Good benefits, work/life balance. Going through a big growth spurt now, so lots of opportunities.

[@ftw08]

Awesome video! Thank you!!!