🏦 Bonds & The Fed · Lesson 3 of 7 · 9 min
How Interest Rates Move Bond Prices
📉 'Bonds are the safe part' — right up until 2022, when the Fed raised rates and long-term Treasury funds fell 30%. Nobody lied. People just didn't know the one rule: when rates go up, the bonds you already own go down. It's a seesaw, and most people are sitting on the wrong end without knowing it.
💡 Key idea
Rates UP → bond prices DOWN. Rates DOWN → bond prices UP. Memorize this.
🧠 Why it matters
Bond prices and interest rates move INVERSELY. If you hold a 3% bond and new bonds pay 5%, yours is less attractive — so its price drops. If new bonds drop to 1%, your 3% bond is suddenly hot — its price rises.
🌍 In the real world
💥 2022: Fed raised rates fastest in 40 years to fight inflation. Long-term Treasury ETF (TLT) lost 30%+. Investors thought 'bonds are safe!' but didn't know about duration risk. Hard lesson.
📌 Takeaways
- Rates and bond prices move OPPOSITE
- Longer bonds = more sensitive
- Holding to maturity avoids the price swing
✅ Test yourself
If interest rates rise, what happens to existing bond prices?
- They rise too
- They fall
- Nothing
- Depends on the weather
Answer: B · They fall
Inverse relationship: rates UP, bond prices DOWN. Your 3% bond is less attractive when new bonds pay 5%.
Which bond is MOST sensitive to interest rate changes?
- 30-year Treasury
- 1-month T-Bill
- Both equal
- Neither
Answer: A · 30-year Treasury
Longer-dated bonds (30-year) are more sensitive to rate changes than short ones (1-month). Duration = sensitivity.
How can you avoid bond price losses from rising rates?
- Sell immediately at any sign of trouble
- Hold to maturity — you'll get full face value back
- Only buy crypto
- Bonds can never lose money
Answer: B · Hold to maturity — you'll get full face value back
If you hold a bond to maturity and the issuer doesn't default, you get the full face value back. Price swings only matter if you sell early.
Quiz, XP and streaks in the app. No sign-up needed.