This is where it gets interesting If you own a bond, you are lending money to a company or a government While the company or government pays you a fixed interest rate in exchange for your loan, the interest rate on bonds is fixed and the bond holder receives the interest payments at specific times If the interest rate on bonds rises, the price of the bonds must adjust to compensate for the higher interest rates, resulting in a lower price for the bond The reason for this is that if you bought a bond at a lower price, the next payment will be worth more in dollar terms

The opposite is true when the interest rate on bonds falls If the interest rate on bonds falls, the bond price must increase to compensate for the lower interest rate, resulting in a higher price for the bond

This is a very simple example of how interest rates affect the price of bonds and how interest rates affect the price of bonds affects the price of stocks

The same is true when it comes to the stock market If the interest rate on bonds rises, the price of stocks must adjust to compensate for higher interest rates, resulting in a lower price for the stock The opposite is true when interest rates fall

This is why the Federal Reserve and the behavior of the bond market plays such a large role in determining the overall health of the stock market