Why do bond prices fall when interest rates rise?

Bond prices and interest rates move in opposite directions because of competition between old and new bonds. If you own a bond paying 3% and new bonds start paying 5%, no one will buy yours at full price, so its market value drops until its effective yield matches the new 5%. When rates fall, the reverse happens and your older, higher-paying bond becomes more valuable.

The longer a bond's maturity, the more its price swings when rates change, a sensitivity measured by 'duration.' A bond fund with a duration of 7 roughly loses 7% if rates rise one percentage point, and gains about that much if rates fall. This is why long-term bonds are more volatile than short-term ones. If you hold an individual bond to maturity, you still get your face value back regardless of interim price swings.