Relationship between bond prices, the stock market and interest rates To illustrate the relationship between bond prices and interest rates consider a 19th century bond issued by the British government called a consul. This bond paid a set nominal rate of interest forever. The interest rate a government must pay to obtain buyers for its bonds depends on the supply and demand of competing financial assets.
Governments desire to sell their bonds at the lowest interest rate possible.
The price of consuls adjusts such the interest payment equals the market rate of interest. The purpose in introducing consuls was to eliminate the problem with the time horizon of current bills, notes and bonds. Currently at the end of the stated time horizon, for example a 30 year bond, the government pays back the principal in full. What this means the longer the time horizon before repayment of principal the more the bond acts like a consul. For short term debt the price changes only slightly with varying interest rates.