why do bond prices react inversely to interest rate changes 
a bond is a debt instrument that typically pays a fixed rate of interest over its lifetime 12 say that prevailing interest rates are 5 if a bond is priced at par 1 000 and has an interest rate coupon of 5 it will pay 50 a year to bondholders if interest rates rise to 10 new bonds issued will pay double i e 100 per 1 000 in face value an existing bond that only pays 50 will have to sell at a steep discount in order for somebody to want to buy it likewise if interest rates drop to 1 new bonds will only pay 10 per 1 000 in face value hence a bond that pays 50 will be in high demand and its price will be bid up quite high the bottom linean interest rate is the cost of debt for the borrower and the rate of return for the lender when you take out a loan you are expected to pay the entity lending you money something extra as compensation likewise if you deposit money in a savings account the financial institution may reward you because it can use part of this money to make more loans to its customers these charges or payments are called interest and are applied at a specified rate 