How does a rise in interest rates generally affect bond prices?

A rise in interest rates generally leads to a decrease in bond prices due to the inverse relationship between bond prices and interest rates. When interest rates increase, newly issued bonds tend to offer higher yields to attract investors. As a result, existing bonds with lower yields become less attractive, leading to a reduction in their market prices.

Investors are interested in maximizing their returns, so if the yields on new bonds are higher, they will demand a discount on existing bonds that pay lower rates. This adjustment in price reflects the need for an investor to achieve a yield comparable to the new bonds when considering their investment options. Therefore, when interest rates rise, the market value of existing bonds falls, resulting in a decrease in bond prices overall.