The Key to Bond Investing: The Relationship Between Interest Rates and Bond Prices

Since COVID-19, interest rates have risen considerably, and many more people have become interested in bond investing.
There is something anyone starting to invest in bonds must know.
It is the principle by which bond prices change.
Let's look at the conceptual side of why bond prices rise and fall with interest rates.
Before investing in bonds, the most important thing is to understand how bond prices change.

I'll explain with a common example from the actual market.

### Basic example: a 3-year bond ###
- Investment amount: 10,000,000 won
- Maturity: 3 years
- Annual interest rate: 3%
(1.5% paid every 6 months)
- Interest received every 6 months: 150,000 won
- Total interest per year: 300,000 won
- Amount at maturity: principal of 10,000,000 won

### Bond price changes when market rates rise ###
When interest rates rise from 2% to 4%:
1. New deposits offer 4% interest (2% every 6 months), but our bond still offers only 3% (1.5% every 6 months).
2. To sell this bond, you have to lower its price.
3. For example, if there is one year left to maturity, the 1% shortfall (100,000 won per year) over the remaining two interest payments must be deducted from the bond price.
4. As a result, the bond price falls to 9,900,000 won or below.

### Bond price changes when market rates fall ###
When market rates fall from 4% to 2%:
1. New deposits pay only 2% interest (1% every 6 months), but our bond offers 3% (1.5% every 6 months).
2. The value of this bond goes up.
3. For example, if there is one year left to maturity, the bond price rises by the extra 1% (100,000 won per year) received over the remaining two interest payments.
4. As a result, the bond price rises to 10,100,000 won or above.

### Key principle ###
Remember the most important rule:
- When market interest rates rise → bond prices fall.
- When market interest rates fall → bond prices rise.

This is the basic principle of bond investing.
Actual bond trading requires more complex calculations, but understanding this basic concept is the first step.
Most domestic bonds pay interest every 6 months, so it is a good idea to plan your investments with this interest payment cycle in mind.
Once you understand this principle, you can set bond investment strategies based on your interest rate outlook.
If you expect interest rates to fall, you might consider buying bonds; if you expect rates to rise, you might consider buying bonds more cautiously.