Bond prices rise when interest rates fall.

Bond prices rise when interest rates fall.

If you own a $1,000 bond that yields 5%, and newly issued bonds pay only 4%, investors will pay more than $1,000 for your bond. When bond prices rise, you win twice: You collect interest and reap the price gains when you sell.

Bond prices fall when rates rise.

If newly issued bonds yield 6%, you'll have to cut your 5% bond's prices to attract buyers. Your bond's price losses might exceed your interest payments.

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