📚 Stock Market Glossary

Clear, beginner-friendly explanations, real-world analogies, and visual formulas for key stock market terminology.

View Mode:

Total 649 terms available

Inverse Bond Price & Yield Relationship

Macro & Policy

💡 Key Takeaway: The fundamental economic mechanic where bond market prices move inversely to prevailing interest rate yields.

Seesaw Analogy: Interest rate yields and bond prices sit on opposite ends of a seesaw—when yields rise, bond prices drop immediately.

😎 10-Second Show-off Pro Tip for Friends!

😎 Show-off Tip: Say, 'When rate cuts loom, extending duration in long-term Treasuries captures capital gains from price appreciation as yields fall.'

STEP 1

The Inverse Bond Price and Yield Relationship is the cornerstone rule of fixed-income investing.

STEP 2

Yields Rise ➔ Bond Prices Fall: When interest rates jump, existing fixed-rate bonds paying lower coupons become unattractive, driving their market prices down.
Yields Fall ➔ Bond Prices Rise: Conversely, when rates drop, older bonds locked into higher yields command premium prices in secondary trading.

STEP 3

This principle explains why Treasury bond ETFs surge in price when the Federal Reserve cuts interest rates.

📊 Bond Duration Price Change Formula

Bond price change rate (%) ≈ -1 × Duration (years) × Interest rate change (%)

▶ The price of 10-year duration bonds increases by approximately +10% when interest rates fall by 1%p

Market interest rate status	Interest attractiveness of existing bonds	Bond market trading prices
Interest rate increase (interest rate rise)	Less attractive compared to new high-interest bonds	Bond prices plummet (loss occurs)
Interest rate cut (interest rate decline)	Premiums for high-interest coupon bonds surge in the past	Bond prices soar (profit from trading)

Aggressive Fed rate hikes in 2022 caused long-term U.S. Treasury bond ETF (TLT) prices to decline over 40%.