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An increase in interest rates generally leads to decreased bond prices due to the inverse relationship between interest rates and bond prices. When interest rates rise, newly issued bonds tend to pay higher yields to attract investors. Consequently, existing bonds with lower coupon rates become less attractive, leading to a decline in their prices. Investors demand a discount on these existing bonds to match the higher yields available in the market for new issuances.

This fundamental principle in bond pricing illustrates how fixed income securities respond to changes in interest rates, reflecting the opportunity cost of holding lower-yielding bonds when more attractive investment opportunities arise. Such dynamics underscore the importance of understanding interest rate risk for fixed income investors.