Question
How are bond yields and prices related?
Answers
The bond price is the present value of cash inflows from the bond, discounted by the market yield. So bond price, coupon rate and yield are all connected. Given any two, the third can be easily calculated.
In the bond markets, it is the price of a bond that is known and quoted. Information on coupon rate and redemption are also available. Given the bond price and its coupon, the yield can be computed.
If the investor purchases the bond at a price lower than the face value, then he has acquired it at a price cheaper than the originally issued price. As a result yield will be higher than the coupon rate. If the investor purchases the bond at a price higher than the face value, then he has acquired it at a higher price than the original face value, so his yield will be lower than the coupon rate.
There is an inverse relationship between yield and price of a bond.  As bond price falls, the yield to the investor goes up. This is because as the discounting rate (or yield) is increased, the final present value (price) reduces.   Your Comment




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