Why does an increase in Interest Rates make Bond prices go down?

Question

Also what are the other factors that affect bond prices, and what effects do they have on the price?

Answer 1

Interest rates and bond prices have an inverse relationship. As illustrated below, when interest rates rise, bond prices generally fall. Conversely, when interest rates decline, bond prices tend to rise.

When rates go up, newly issued bonds come to the market with higher yields than existing bonds. The newly issued bonds are more attractive than comparable existing bonds with lower yields. In order to sell their existing bonds, investors have to reduce their prices to make them equally attractive.
Generally speaking, the prices of longer-term bonds are more sensitive than shorter-term bonds to changing interest rates. Similarly, fixed income funds with longer average maturities tend to be more sensitive to interest rate changes than funds with shorter average maturities.

Answer 2

if interest rates rise, then the coupon/yield being offered on the bond becomes less attractive, the reason being is that an interest rate rise means that an investor can obtain a higher return on the money markets.

Other factors that might affect price is the ratings of the bond, ie how likely it is that the bond issuer might default, companies are rated by moodys, and standard and poors who are auditors/accountants, the ratings run alphabetically,
with aaa+ being the highest rating.

Also if the company who issued the bonds is in difficulties the bond price will go down (as its more likely that they might default)

Answer 3

The interest rate on existing bonds is lower than current rates so the bonds have to sell @ a lower price to attract investors.

Answer 4

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