What is the relationship between bond yield and bond price?

What is the relationship between bond yield and bond price?

The relationship between bond yield and bond price is inverse: when bond prices rise, yields fall, and when bond prices fall, yields rise. This relationship is governed by the formula:

Yield = Annual Coupon Payment/Current Bond Price

Here's how it works:

  1. Bond Price Increases: If the price of a bond goes up, the denominator in the yield formula increases, causing the overall yield to decrease.

      2.   Bond Price Decreases: Conversely, if the bond price decreases, the denominator in the yield formula decreases, leading to an increase in yield.

For example , if a bond with a face value of ₹1,000 and an annual coupon payment of ₹50 is priced at ₹1,000, the yield is:

Yield = 50/1000 = 5%

If the bond price rises to ₹1,100, the yield becomes:

Yield = 50 / 1100 ≈ 4.55%

5paisa provides real-time data and analytical tools to monitor bond prices and yields, helping investors understand these dynamics. The platform offers insights, alerts, and calculators to track how price changes affect yields, assisting you in making informed investment decisions. With 5paisa's resources, you can optimize your bond portfolio by strategically responding to market conditions.



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