Typically, bond prices increase when interest rates decrease. Because bond prices and interest rates are inversely correlated, this is the case
Newly issued bonds’ yields will be lower than those of older, higher-interest-rate bonds as interest rates decline
This makes older bonds more valuable because they offer a higher yield than newly issued bonds
As a result, the prices of existing bonds increase to reflect this higher value
For example, suppose an investor purchases a bond with a 5% yield when interest rates are at 5%
If interest rates then fall to 4%, newly issued bonds will have a yield of 4%
The investor’s 5% bond will then become more valuable because it offers a higher yield than newly issued bonds
As a result, the price of the bond will increase to reflect this higher value