Published Jun 16, 2026 4 Min Read

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Introduction

Bond prices and yields share an inverse relationship. This means a fall in bond prices leads to higher yields, while a rise in bond prices leads to lower yields. Understanding this relationship can help you make better fixed-income investment decisions.

  • Bond prices and yields always move in opposite directions.
  • Yield measures the return you earn from a bond based on its current market price.
  • Rising interest rates usually reduce existing bond prices.
  • Falling interest rates generally increase existing bond prices.
  • Inflation can reduce the attractiveness of fixed coupon payments.
  • Yield to Maturity (YTM) considers both coupon payments and capital gain or loss until maturity.

You can use the Bajaj Broking website to learn more about fixed-income investments and make informed investment decisions.

What is a bond?

A bond is a fixed-income investment where you lend money to a government, company, or financial institution for a fixed period. In return, the issuer pays you regular interest, known as a coupon, and repays the principal amount at maturity.

Bonds are commonly used by investors who want predictable income and lower volatility compared to many equity investments.

FeatureDescription
IssuerGovernment, PSU, corporation, or financial institution
Interest paymentFixed or variable coupon
MaturityPredefined repayment date
Risk levelGenerally lower than equities, but varies by issuer

What are bond prices?

A bond price is the amount you pay to buy a bond in the market. After issuance, bond prices can move up or down depending on interest rates, inflation expectations, and market demand.

For example, a bond issued at Rs. 1,000 may later trade at Rs. 950 or Rs. 1,050. The market price changes, but the coupon payment generally remains fixed.

What is bond yield?

Bond yield represents the return you earn from a bond based on its current market price. It helps you compare bonds that may have different prices and coupon rates.

A simple bond yield formula is:

Current Yield = Annual Interest Payment ÷ Current Bond Price × 100

For example, if a bond pays Rs. 70 annually and trades at Rs. 1,000, its yield is 7%.

Annual interestBond priceCurrent yield
Rs. 70Rs. 1,0007.0%
Rs. 70Rs. 9507.37%
Rs. 70Rs. 1,0506.67%

Examples of the inverse relationship between bond prices and yields

The relationship between bond prices and yields becomes clear when market prices change while coupon payments remain the same.

Suppose a bond pays Rs. 80 annually.

Bond priceAnnual couponYield
Rs. 1,000Rs. 808.0%
Rs. 900Rs. 808.89%
Rs. 1,100Rs. 807.27%

When the bond price falls from Rs. 1,000 to Rs. 900, the yield increases. When the bond price rises to Rs. 1,100, the yield decreases. This demonstrates the bond yield inverse relationship.

Why is the relationship between bond prices and yields inverse?

The inverse relationship exists because the coupon payment remains fixed while the market price changes.

If new bonds are issued with higher interest rates, older bonds with lower coupon rates become less attractive. Their prices fall so that their yields become competitive with newer bonds.

Similarly, when interest rates fall, older bonds with higher coupon payments become more valuable. Investors are willing to pay a premium, pushing prices up and yields down.

Impact of inflation on bond prices and yields

Inflation affects the purchasing power of future interest payments. When inflation rises, investors often demand higher yields to compensate for the reduced value of future cash flows.

As a result, existing bond prices may decline. Bonds with longer maturities are generally more sensitive to inflation expectations because their payments are spread over a longer period.

Inflation trendLikely effect on bond pricesLikely effect on yields
Rising inflationFallRise
Stable inflationStableStable
Falling inflationRiseFall

Conclusion

Understanding bond prices and yields is important if you invest in fixed-income securities. The bond price relationship is simple: prices and yields move in opposite directions.

Interest rates, inflation, and market demand influence bond valuations. By understanding why bond prices fall when yields rise, you can better evaluate bond investments and make more informed financial decisions.

Frequently asked questions

Why do bond prices fall when interest rates rise?

When interest rates rise, newly issued bonds offer higher coupon rates. Existing bonds with lower coupon payments become less attractive. To remain competitive, their market prices fall. This price adjustment increases the yield on older bonds, helping align them with prevailing market interest rates and maintaining the inverse relationship between bond prices and yields.

What happens to bond yield when bond price increases?

When a bond's market price increases, its yield decreases. This happens because the fixed annual coupon payment is spread over a higher purchase price. For example, if a bond pays Rs. 80 annually, the yield falls when the price rises from Rs. 1,000 to Rs. 1,100. The Bajaj Broking website provides educational resources on such bond concepts.

What is the difference between coupon rate and bond yield?

The coupon rate is the fixed interest percentage set when a bond is issued. Bond yield is the actual return based on the bond's current market price. The coupon rate generally remains unchanged, while the yield changes as bond prices move up or down in the secondary market.

What is yield to maturity (YTM) in bonds?

Yield to Maturity (YTM) is the total expected annual return if you hold a bond until its maturity date. It considers coupon payments, the bond's purchase price, face value, and the time remaining until maturity. YTM provides a more complete measure of return than current yield alone.

How does the RBI repo rate affect bond prices in India?

The RBI repo rate influences borrowing costs and overall interest rates in the economy. When the RBI raises the repo rate, bond yields generally rise and existing bond prices tend to fall. When the repo rate is reduced, bond yields often decline and bond prices usually increase. The Bajaj Broking website offers insights into such market movements.

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