With the Federal Reserve’s recent announcement that is will drop interest rates, many investors are asking how a rate change could impact their portfolios. One of the most important — yet often misunderstood — relationships in finance is that between interest rates and bond prices. In this article, we’ll break down how they interact and why changes in rates can directly affect the value of your bond holdings.

In high school, there was this thing called “high waters.” If your jeans or khakis showed any of your socks or, worse yet, the skin from...