Need some info on government bonds

Question

Need a little info on government bonds

How exactly do interest rates determine bond prices?

I am reading an "Economics for Dummies" book, and it mentions that when interest rates go up bond prices go down. I am not quite sure what exactly the meaning of price is in that context. I thought bonds are sold at a set price. For example, when you buy a $100 bond it will cost $100, but you gain some interest off of that.

Can someone please shed some light on this. Thanks.

Answer 1

If you buy bonds from the issuer then you pay the price they are first issued at.  But bonds trade in the secondary market just like stocks.  So, the price fluctuates.  And bond prices are heavily dependent on interest rates.  Whwen rates go up the price of the bond goes down.  Another way to state it is, price goes up, yield goes down and vice versa.  If you buy it from the issuer you will pay the issue price, like a $100 in your example, and collect the coupon payments at the stated interest rate, and sell it at maturity for the $100 you bought it for.  But, if you bought it in the secondary market you may pay a different price, and have a different interest rate (yield).