# Bond Prices vs Interest Rates Bond prices and interest rates have an **inverse** relationship:  ### Intuition Price curves tend to refer to the **price** of an asset/good **now**, *as a specific variable changes today*. If we are thinking about `number of apples` and `price` we can clearly reason that if the `number of apples` increases, the `price` will decrease. Bonds and interest rates a bit counterintuitive. If we *increase* the interest rate of a bond, we have made it *more valuable*. So why would the price of *that bond* go down? And that is the misconception! The price of *that bond* will not go down! The price of *the other existing bonds* will go down! Consider our apple analogy again. Imagine I told you the following: > Due to new technology, we have increased our ability to make delicious juicy apples by 10 fold. Would that increase or decrease the price of these delicious juicy apples? It would decrease them! We have *made the apples better*, yet the price decreased! Of course, if I told you that I managed to procure a *single delicious juicy apple* unlike anything you have ever tasted, that would surely *increase* the price of *that apple*. Why am I taking the time to work through this so methodically? Because there is a hidden variable at play in these types of price curves: **quantity**. It is generally assumed to be large, i.e. the entire set of all the goods (i.e. all apples). But sometimes we may start mixing the *quantity* of the good, the *price*, and the *quality* (or some other variable). That is what is occurring in the interest rates example! We have: * The **price** of the bond * The **interest rate** (i.e. quality) of the bond * The **quantity/space/set** of all other bonds It is this additional variable that makes it a bit harder to wrap your head around at first. --- Date: 20220814 Links to: [Quantitative Finance MOC](Quantitative%20Finance%20MOC.md) Tags: #review References: * []()