If market interest rates increase, what typically happens to the prices of outstanding bonds?

When market interest rates increase, the prices of outstanding bonds typically decline. This occurs because existing bonds with lower interest rates become less attractive compared to new bonds issued at the higher rates. Investors will demand a discount on the older bonds to yield a competitive return relative to the prevailing rates in the market.

For instance, if an investor holds a bond that pays a fixed interest rate of 3% and the current market interest rate rises to 5%, the bond's fixed rate is now less appealing. Therefore, to sell the bond, the holder would likely need to lower the price to attract buyers who could get a higher return from newly issued bonds.

This inverse relationship between interest rates and bond prices is a fundamental concept in fixed-income investing, making it crucial for investors to understand how shifts in market rates can impact the value of their bond holdings.