Series 6: 4.2.6. Interest Rates And Bond Prices

4.2.6. Interest Rates and Bond Prices

As interest rates rise, the prices of bonds decline in the secondary market because investors can invest their money in higher paying new issues. This is considered market risk for bond investors. Market risk is greater for long-term bonds than short-term bonds because there is more opportunity for interest rates to rise over the bond’s life. To reduce market risk, investors could invest in short-term bonds over long-term bonds because when interest rates rise, the prices of long-term bonds fall faster than the prices of short-term bonds.

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