Bond investing is built on one key relationship: “bond prices and bond yields move in opposite directions”. This inverse movement can be thought of like a seesaw:
- When yields rise, bond prices fall
and
- When yields fall, bond prices rise.
Okay, but why does this happen? When market interest rates rise, new bonds are issued with higher yields. As a result, older bonds, which pay lower interest, become less attractive. Now, to compensate investors for this lower return, the market price of these older bonds falls.
The reverse occurs when market interest rates decline. In this situation, older bonds paying higher interest become more attractive, and their prices rise. Read this article to understand the concept of bond prices vs yields in detail.
The Inverse Relationship Between Bond Prices and Yields
Bond prices vs yields always move in opposite directions due to the constant nature of a bond’s coupon (interest) payments and the way bonds are valued in relation to changing interest rates in the market.
Please realise that bonds pay fixed coupon amounts, but interest rates in the economy are always changing. Now, because of this, the market price of a bond must adjust so that older bonds remain competitive with newly issued bonds. This price adjustment is what creates the well-known opposite movement between prices and yields
Let’s understand the bond prices and yields relationship better through the table below:
| Scenario | What Happens in the Market | Impact on Existing Bonds | Price Movement | Yield Movement |
|---|---|---|---|---|
| Interest rates rise | New bonds are issued with higher coupon rates | Older bonds now pay lower coupons compared to new issues | Prices fall to make older bonds attractive | Yields rise because investors pay less for the same coupon |
| Interest rates fall | New bonds come with lower coupon rates | Older bonds pay higher coupons than new issues | Prices rise (often above face value) | Yields fall because investors pay more for the same coupon |
The Mathematical Basis
A bond pays a constant coupon amount every year. But the market price of the bond changes every day. To measure how much return an investor gets at today’s price, this basic formula is used:
Yield = Annual Coupon PaymentCurrent Market Price x 100
Now, this formula alone explains the entire inverse relationship between bond prices vs yields. Let’s see how:
| Situation | What Happens to Price (Denominator) | Mathematical Effect on Yield | Final Outcome |
|---|---|---|---|
| Bond price increases | The denominator becomes larger | Same coupon divided by a larger number = smaller yield | Yield decreases |
| Bond price decreases | The denominator becomes smaller | Same coupon divided by a smaller number = larger yield | Yield increases |
As an investor, you must observe in the above formula that a bond’s “annual coupon amount” (numerator) stays constant every year. The denominator (price) is the only part that changes in the market. That’s why any movement in price must show up as a change in yield.
For more clarity, let’s study a hypothetical example.
Example
Let’s assume the following bond details:
- Face value: ₹1,000
- Coupon rate: 7%
- Annual coupon payment: ₹70
Now, consider these two distinct scenarios:
1. When interest rates rise to 8%
Let’s assume that new bonds pay ₹80 per year (8% of ₹1,000). But your bond still pays ₹70. Since, bond investors always compare the two options, they found that your ₹70 is less attractive unless the price comes down. So now, they are offering ₹900 for your bond.
As a result, the new yield of your bond turns out to be:
Yield = Annual Coupon PaymentCurrent Market Price x 100
Yield =₹70₹900 x 100 =7.78%
This higher yield brings your bond’s return closer to the new 8% market rate. This fall in market price of the bond makes it more aligned with current investor expectations and improves its chances of being traded in the secondary market.
2. When interest rates fall to 6%
Let’s assume that new bonds now pay ₹60 per year (6% of ₹1,000). But your bond still pays ₹70, which is higher. Now, because ₹70 is more attractive, the market value of the bond increases to match the market interest rate. Say the new market price becomes ₹1,100.
In this case, the yield offered by your bond would be:
Yield =₹70₹1100 x 100 =6.36%
The higher market price of your bond makes its yield move closer to the new 6% market rate.
To Sum It Up, Bond Prices and Yields Are Inversely Related
So now you know that the market price of any bond depends on the prevailing interest rates in the economy. Bonds that continue to trade in the secondary market must constantly adjust their prices and yields to align with “new-issue coupon rates”.
Please realise that when interest rates rise, existing bonds often lose value. As an investor, you may manage this risk through portfolio diversification.
If you are looking to invest in bonds and want options that offer competitive returns, you may visit the GoldenPi platform. Here, you can explore AAA-rated bonds, government securities, PSU bonds, and corporate bonds. All the bonds are listed along with important details on coupon rates, current yields, tenures, and more. Also, the entire investment process is online, with no branch visits required.
Bond Prices vs Yields FAQs
1. How do I calculate a bond’s price?
A bond’s price is the present value (PV) of its future coupon payments and its face value. Usually, this sum is discounted using current market interest rates for similar bonds.
2. How is a bond’s price affected by the RBI’s repo rate?
When the RBI changes the repo rate, it changes the overall borrowing costs in the economy. A higher repo rate generally leads to higher market interest rates, which lowers the prices of existing bonds. Conversely, a repo rate cut tends to raise bond prices.
3. What is the latest government bond yield in 2025?
As of November 20, 2025, the yield on India’s 10-year government bond is about 6.50% based on recent interbank and market data.
4. If the market value of my bond fell, would it impact my interest payments or maturity amount?
No! A drop in your bond’s market price does not change the interest/ coupon payments you receive, nor does it reduce the face value you will get at maturity (unless the issuer defaults).
4. How do I invest when interest rates are rising?
When interest rates rise, it may be sensible to avoid long-term bonds, which may see their value erode due to lower coupon rates. Short-term bonds could be preferred in such conditions. They may experience smaller price declines, and once they mature, you can reinvest the proceeds at the higher interest rates.
