{"id":4105,"date":"2022-06-03T08:30:23","date_gmt":"2022-06-03T08:30:23","guid":{"rendered":"https:\/\/goldenpi.com\/blog\/?p=4105"},"modified":"2026-04-15T09:21:48","modified_gmt":"2026-04-15T09:21:48","slug":"how-bond-price-impact-yield","status":"publish","type":"post","link":"https:\/\/goldenpi.com\/blog\/essentials\/bond-market\/how-bond-price-impact-yield\/","title":{"rendered":"How Bond Price Impact Yield"},"content":{"rendered":"<p>Bonds have emerged as a good substitute for equity investments and bank fixed deposits. However, knowing the relationship between yield and price is crucial for making the right investment decision.<\/p>\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_79_2 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/goldenpi.com\/blog\/essentials\/bond-market\/how-bond-price-impact-yield\/#Introduction_Bond_Yields\" >Introduction : Bond Yields<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/goldenpi.com\/blog\/essentials\/bond-market\/how-bond-price-impact-yield\/#What_is_Bond_Price\" >What is Bond Price?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/goldenpi.com\/blog\/essentials\/bond-market\/how-bond-price-impact-yield\/#What_is_Bond_Yield\" >What is Bond Yield?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/goldenpi.com\/blog\/essentials\/bond-market\/how-bond-price-impact-yield\/#What_is_the_Relationship_Between_Bond_Price_and_Bond_Yield\" >What is the Relationship Between Bond Price and Bond Yield?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/goldenpi.com\/blog\/essentials\/bond-market\/how-bond-price-impact-yield\/#What_is_the_Difference_Between_Bond_Yield_and_Price\" >What is the Difference Between Bond Yield and Price?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/goldenpi.com\/blog\/essentials\/bond-market\/how-bond-price-impact-yield\/#Bond_Price_Formula_What_Determines_a_Bonds_Price\" >Bond Price Formula: What Determines a Bond&#8217;s Price?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/goldenpi.com\/blog\/essentials\/bond-market\/how-bond-price-impact-yield\/#Why_do_Bond_Prices_Fall_When_Yields_Rise\" >Why do Bond Prices Fall When Yields Rise?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/goldenpi.com\/blog\/essentials\/bond-market\/how-bond-price-impact-yield\/#What_is_the_Bond_Yield_Right_Now\" >What is the Bond Yield Right Now?<\/a><\/li><\/ul><\/nav><\/div>\n<h2><span class=\"ez-toc-section\" id=\"Introduction_Bond_Yields\"><\/span><strong>Introduction : Bond Yields<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><a href=\"https:\/\/goldenpi.com\/blog\/bond-market-2\/global-bond-market-trends-affecting-indian-investors\/\">Bonds<\/a> have emerged as a rewarding alternative investment option for low-risk investors in India. Since bonds are traded in the secondary market, they are much less volatile than equity stocks traded in the primary market. Although mutual funds in general and bond funds in particular facilitate bond investment, you can also invest directly in bonds. Stability and decent returns frequently attract buyers to the <a href=\"https:\/\/goldenpi.com\/\" target=\"_blank\" rel=\"noopener noreferrer\">bond market<\/a>.<\/p>\n<p>The bond market is usually overseen and managed by the securities and exchange commission of a country. For instance, the Securities and Exchange Board of India controls the bond market.<\/p>\n<p>Earlier, only High Net Worth Investors (HNIs) and corporate financial institutions could invest in bonds. Presently, retail individual investors can conveniently invest in high-yield bonds in India. Investors often prefer investing in 3-year or 5-year bonds in India for getting higher yields.<\/p>\n<p>However, before investing in bonds, or evaluating <a href=\"https:\/\/goldenpi.com\/bond-ipo-online\" target=\"_blank\" rel=\"noopener\">upcoming bond IPOs<\/a>, it is wise to know the coupon rate, present value (read: price), prevailing <a href=\"https:\/\/goldenpi.com\/blog\/fixed-deposit\/post-office-one-year-fd-interest-rate-review\/\">interest rates,<\/a> and the bond&#8217;s face or par value.<\/p>\n<p>This article explains the relationship between bond yields and bond prices and also discusses the formula to help you make sensible investment decisions in fixed income securities.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"What_is_Bond_Price\"><\/span><strong>What is Bond Price?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Bonds are generally issued by Central and State governments to get funds for social and infrastructural development projects. The government also issues bonds to manage its debt obligations. Bonds, like debentures, are fixed income securities with a fixed, predefined interest rate and maturity.<\/p>\n<p>When investors buy a<a href=\"https:\/\/goldenpi.com\/blog\/investment-guide\/government-bonds-should-you-invest-where-to-buy\/?utm_source=blog&amp;utm_medium=blog&amp;utm_campaign=bondyield\" target=\"_blank\" rel=\"noopener noreferrer\"> <strong><span style=\"color: #004f98;\">government <\/span><\/strong><\/a>or <a href=\"https:\/\/goldenpi.com\/corporate-bonds\" target=\"_blank\" rel=\"noopener noreferrer\">corporate bond<\/a>, the bond issuer promises a coupon payment rate. The coupon rate refers to the prevailing interest rate of a bond. When the bond matures, investors get the coupon rate. This is why bonds are known as fixed-income assets. Bonds have different maturity dates, typically ranging from one year to thirty years.<\/p>\n<p>Although bonds deliver fixed returns, that isn&#8217;t why investors invest in short or long term bonds. They invest by looking at the bond&#8217;s yield, price, and value. Investors carefully evaluate the bond yield curve before making investment decisions.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"What_is_Bond_Yield\"><\/span><strong>What is Bond Yield?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Investors invest in government and corporate bonds primarily for the &#8216;Yield&#8217; component, not the coupon rate. Under normal circumstances, the yield remains comfortably higher than the price. This is what makes the existing bonds more attractive and remunerative than bank term deposits.<\/p>\n<p>Bond yield is closely related to its price. It refers to the actual return and not the actual price of the bond. Yield is also the real interest rate of a bond. Bond yields are set in many ways.<\/p>\n<p>The simplest way of setting the yield is by making it equal to the coupon rate or a bond&#8217;s par, meaning the money the bond issuer promises to pay investors. The current yield of a bond is calculated by comparing it with the bond&#8217;s interest rate or coupon rate. A bond&#8217;s yield is also calculated through Bond Equivalent Yield (BEY), Yield to Maturity (YTM), and Effective Annual Yield (EAY).<\/p>\n<p>Bond issuers set the coupon payment amount with the current interest rates at the time of the bond issuance. The yield is typically more than the cash rate to make bonds more attractive than term deposits.<\/p>\n<p>While mutual funds, particularly bond funds, make it easier to invest in bonds, <a href=\"https:\/\/goldenpi.com\/blog\/fixed-income\/corporate-bonds\/how-to-invest-in-corporate-bonds-in-india\/\" target=\"_blank\" rel=\"noopener noreferrer\">how to invest in corporate bonds in India?<\/a> You can invest directly in corporate bonds through a brokerage account or opt for corporate bond mutual funds or ETFs, which provide diversified exposure to the bond market.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"What_is_the_Relationship_Between_Bond_Price_and_Bond_Yield\"><\/span><strong>What is the Relationship Between Bond Price and Bond Yield?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Bond yield and price share an inverse relationship. If a bond&#8217;s price is lower than its face value, the yield will be higher than the coupon payment rate. However, if a bond&#8217;s price is higher than its face value, its yield will be lower than the coupon payment rate.<\/p>\n<p>So, the bond price formula depends on the bond&#8217;s coupon rate and yield. An increase in bond prices means lower yields, while a decrease in bond prices means higher yields.<\/p>\n<p>Bond price also shares an inverse relationship with the interest rates. If the prevailing interest rates rise in the market, bond prices decrease. In contrast, if the interest rates decline, bond prices increase.<\/p>\n<p>Interest rates are related to the inflation rate and share an inverse relationship. So, if a country&#8217;s inflation is high, the country&#8217;s central bank increases the interest rates to tame inflation. Conversely, if inflation is in control, the central bank may reduce the interest rate to boost the country&#8217;s economy. So, a bond&#8217;s price is inversely related to its yield and interest rates, while interest rates are inversely related to the inflation rate.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"What_is_the_Difference_Between_Bond_Yield_and_Price\"><\/span><strong>What is the Difference Between Bond Yield and Price?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>In simple terms, bond yield refers to the actual returns from a bond, while bond price refers to the amount investors pay to purchase a bond. Bonds have three elements &#8211; Face Value or Par Value, Yield or Yield to Maturity, and Price.<\/p>\n<p>Yield (indicated in percentage) refers to the total amount (return) an investor will get if they hold the bond until maturity and reinvest all coupons at the same value as the bond.<\/p>\n<p>In contrast, the bond price is a bond&#8217;s monetary value (also indicated in percentage) an investor will receive on <a href=\"https:\/\/goldenpi.com\/blog\/sovereign-gold-bond\/what-is-the-tenure-or-maturity-period-of-sovereign-gold-bonds\/\">maturity<\/a>. A bond&#8217;s price includes the investment amount as well the coupon payment.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Bond_Price_Formula_What_Determines_a_Bonds_Price\"><\/span><strong>Bond Price Formula: What Determines a Bond&#8217;s Price?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Here is the formula for calculating bond prices:<\/p>\n<p><strong>Bond Price<\/strong> = \u2211 (Cn\u00a0\/ (1+YTM)<sup>n<\/sup>\u00a0) + P \/ (1+i)<sup>n<\/sup><\/p>\n<p>Where:<\/p>\n<ul>\n<li><strong>n =<\/strong> Period which takes values from 0 to the nth period till the cash flows ending period<\/li>\n<li><strong>Cn =<\/strong> Coupon payment in the nth period<\/li>\n<li><strong>YTM =<\/strong> interest rate or required yield<\/li>\n<li><strong>P =<\/strong> Par Value of the bond<\/li>\n<\/ul>\n<p>Let&#8217;s understand this with an example:<\/p>\n<p>Imagine you plan to invest in a bond whose Face Value is INR 1,000, coupon rate is 10%, yield or interest rate is 8%, and maturity is 5 years. If you apply the formula &#8216;= \u2211(Cn\u00a0\/ (1+YTM)<sup>n\u00a0<\/sup>)+ P \/ (1+i)<sup>n<\/sup>&#8216; using the figures stated above, the result will be 1079.9.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Why_do_Bond_Prices_Fall_When_Yields_Rise\"><\/span><strong>Why do Bond Prices Fall When Yields Rise?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>A quick scan of <strong>3-year<\/strong>, <strong>5-year<\/strong>, and <strong>10-year government bond yields<\/strong> in <strong>India<\/strong> suggest that bond price decreases when the yields increase.<\/p>\n<p>But why do yields increase?<\/p>\n<p>When the economy&#8217;s interest rates rise, investors expect more coupon rates from a new bond than existing ones. Since most bonds pay fixed coupon rates, old bonds become less attractive when interest rates increase.<\/p>\n<p>This is because investors would like to<strong><span style=\"color: #004f98;\"> <a style=\"color: #004f98;\" href=\"https:\/\/goldenpi.com\/blog\/essentials\/bond-introduction\/what-you-should-look-for-when-buying-bonds-online\/?utm_source=blog&amp;utm_medium=blog&amp;utm_campaign=bondyield\">invest in new bonds<\/a> <\/span><\/strong>with higher coupon rates. This prompts the bond yields to increase even when the bond prices decrease.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"What_is_the_Bond_Yield_Right_Now\"><\/span><strong>What is the Bond Yield Right Now?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Before investing in a long or short-term bond, check the <strong>10-year government bond yield<\/strong> in <strong>India<\/strong> since it is considered the benchmark. Here is the most comprehensive list of <strong>high-yield bonds<\/strong> in <strong>India<\/strong>:<\/p>\n<p>Note &#8211; All values are as of 17\/03\/2022<\/p>\n<p><img decoding=\"async\" class=\"alignnone wp-image-4107 size-large\" src=\"https:\/\/d2zny4996dl67j.cloudfront.net\/blogs\/wp-content\/uploads\/2022\/06\/03062943\/Yield-1024x440.png\" alt=\"Bond Yield\" width=\"1024\" height=\"440\" srcset=\"https:\/\/d2zny4996dl67j.cloudfront.net\/blogs\/wp-content\/uploads\/2022\/06\/03062943\/Yield-1024x440.png 1024w, https:\/\/d2zny4996dl67j.cloudfront.net\/blogs\/wp-content\/uploads\/2022\/06\/03062943\/Yield-300x129.png 300w, https:\/\/d2zny4996dl67j.cloudfront.net\/blogs\/wp-content\/uploads\/2022\/06\/03062943\/Yield-768x330.png 768w, https:\/\/d2zny4996dl67j.cloudfront.net\/blogs\/wp-content\/uploads\/2022\/06\/03062943\/Yield-585x251.png 585w, https:\/\/d2zny4996dl67j.cloudfront.net\/blogs\/wp-content\/uploads\/2022\/06\/03062943\/Yield.png 1150w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/p>\n<p>Now that you know the relationship between bond price and bond yield, invest in India&#8217;s best high yield government and <strong><span style=\"color: #004f98;\"><a style=\"color: #004f98;\" href=\"https:\/\/goldenpi.com\/blog\/essentials\/bond-market\/corporate-bonds-features-you-need-to-know\/?utm_source=blog&amp;utm_medium=blog&amp;utm_campaign=bondyield\" target=\"_blank\" rel=\"noopener noreferrer\">corporate bonds <\/a><\/span><\/strong>to reap rich dividends, safely and securely. Since bond yields have been hovering around multi-year highs, now is the best time to invest in top-class bonds.<\/p>\n<p>Key Highlights<\/p>\n<p><img decoding=\"async\" class=\"alignnone wp-image-4106 size-large\" src=\"https:\/\/d2zny4996dl67j.cloudfront.net\/blogs\/wp-content\/uploads\/2022\/06\/03062802\/Screenshot-2022-06-03-at-11.33.53-AM-1024x528.png\" alt=\"Bond Yield\" width=\"1024\" height=\"528\" srcset=\"https:\/\/d2zny4996dl67j.cloudfront.net\/blogs\/wp-content\/uploads\/2022\/06\/03062802\/Screenshot-2022-06-03-at-11.33.53-AM-1024x528.png 1024w, https:\/\/d2zny4996dl67j.cloudfront.net\/blogs\/wp-content\/uploads\/2022\/06\/03062802\/Screenshot-2022-06-03-at-11.33.53-AM-300x155.png 300w, https:\/\/d2zny4996dl67j.cloudfront.net\/blogs\/wp-content\/uploads\/2022\/06\/03062802\/Screenshot-2022-06-03-at-11.33.53-AM-768x396.png 768w, https:\/\/d2zny4996dl67j.cloudfront.net\/blogs\/wp-content\/uploads\/2022\/06\/03062802\/Screenshot-2022-06-03-at-11.33.53-AM-1170x604.png 1170w, https:\/\/d2zny4996dl67j.cloudfront.net\/blogs\/wp-content\/uploads\/2022\/06\/03062802\/Screenshot-2022-06-03-at-11.33.53-AM-585x302.png 585w, https:\/\/d2zny4996dl67j.cloudfront.net\/blogs\/wp-content\/uploads\/2022\/06\/03062802\/Screenshot-2022-06-03-at-11.33.53-AM.png 1446w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Bonds have emerged as a good substitute for equity investments and bank fixed deposits. However, knowing the relationship between yield and price&hellip;<\/p>\n","protected":false},"author":4,"featured_media":4112,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"no","_lmt_disable":"","footnotes":""},"categories":[24],"tags":[],"class_list":["post-4105","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-bond-market"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.6 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>How Bond Price Impact Yield<\/title>\n<meta name=\"description\" content=\"Learn what affects the price of bonds and how bond price impacts yield. 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