SIE Ready✨ The big ideas of the SIE · Lesson 1 of 8 · 60 sec
The Bond Seesaw
Interest rates go up, and bonds you already own lose value. Why would a bond fall just because rates rose?
💡 Key idea
Bond prices and market interest rates move in opposite directions; long maturities and low coupons swing the most.
🧠 Why it matters
A bond's coupon is fixed when it is issued. If new bonds start paying more, nobody will pay full price for your older, lower coupon, so its price drops until its yield matches the market. If rates fall, your higher coupon becomes attractive and the price rises. Price and yield sit on opposite ends of a seesaw: one up, the other down. The longer the maturity and the lower the coupon, the longer the plank and the bigger the swing.
📈 In the real world
Maya owns a 4% bond. A month later, new bonds of the same quality pay 5%. A buyer will only take Maya's 4% bond at a discount, low enough that its yield works out to about 5%. Same bond, same coupon, lower price.
📌 Takeaways
- Rates up, bond prices down; rates down, bond prices up
- A bond trades at a discount when its coupon is below market rates
- Longer maturity and lower coupon mean more interest-rate risk
📖 Terms in this lesson
THE SEESAW (bond prices and rates): Rates on one end, bond prices on the other: when rates go up, prices go down, and the reverse.
✅ Test yourself
Market interest rates rise sharply. What most likely happens to the price of an existing fixed-rate bond?
- It rises to match new issues
- It stays at par until maturity
- It converts to a floating rate
- It falls below its prior level
Answer: D · It falls below its prior level
Rising rates make older, lower coupons less attractive, so their prices fall until their yields match the market. The price does not rise, is not frozen at par before maturity, and a fixed coupon never converts to floating on its own.
Which bond would show the biggest price change for the same move in interest rates?
- A 30-year bond with a 2% coupon
- A 2-year bond with an 8% coupon
- A 5-year bond with a 6% coupon
- A 10-year bond with a 7% coupon
Answer: A · A 30-year bond with a 2% coupon
Interest-rate sensitivity grows with longer maturity and lower coupon, so the 30-year, 2% bond swings the most. The short, high-coupon bonds return more cash sooner and move the least.
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