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

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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[Edwin-kveu]

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

[CRMills]

Thanks for explaining the SVB issue 9 years ago. Makes sense

[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 :)

[ttfan]

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)

[elvismark]

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?

[Rendog]

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

[realrobh]

I don't know why I go to school. Why is it so much easier for me to learn from Khan Academy? ?!?!

[madras]

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

[catsmith]

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 !

[Drivingbangers]

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

[divyadixit]

He knows everything. Just love Khan Academy

[lachlantate]

Khan academy is actually the goat. I’ve been using Khan for over 5 years now

[SAM]

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.

[maelmare]

This explanation is a God sent explanation. Well done!

[johnholme]

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

[justSTUMBLEDupon]

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

[SejalPatelDrSej]

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

[PrashantSingh-jjwr]

Best explanation available! Thanks a ton!

[zeytee]

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

[johnhess]

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.