One of the key concepts to understand in fixed-income investment is the relationship between the yield and the bond price. Government securities, corporate bonds, or debt mutual funds\u2014being able to comprehend how prices and yields change can allow you to make better decisions regarding your investments.<\/p>\n\n\n\n
Typically, a new investor thinks that since a bond pays a fixed interest amount, the bond price would stay constant. However, the fact is that prices for bonds fluctuate regularly based on interest rates, inflation expectations, economic conditions, and demand from investors.<\/p>\n\n\n\n
What you should always remember is that bond prices and yields move in the opposite direction.<\/p>\n\n\n\n
So, when the price of a bond increases, the yield of that bond will decrease. When the price of a bond goes down, the yield on that bond goes up.<\/p>\n\n\n\n
This inverse relationship is basic to investing in the bond market<\/a>. It drives debt mutual fund returns and ultimately determines the amount of government borrowing costs.<\/p>\n\n\n\n