Markets · 6 pages · 12 min
Why bond prices and yields move apart
When a bond's price rises, the yield implied by its fixed promised payments falls.
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From the opening
A bond's price is what a buyer pays today for the remaining promised coupons and the principal at maturity. Its yield is the rate that makes those future payments equal, in today's terms, to that price, so a higher price means a lower yield and a lower price means a higher yield. The opening covers fixed coupons do not follow the price, a higher price lowers the yield, and a lower price raises the yield.
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Inside
- Fixed coupons do not follow the price
- A higher price lowers the yield
- A lower price raises the yield
- New issues set the coupon to fit
- Where the idea stops applying
- A distinction worth keeping
Sources
- Inverse relationship of bond price and yield
- Yield to maturity