Bond price and yield relationship
prices and yields move in opposite directions. When a 's price rises, the fixed income stream it pays becomes worth less relative to what an investor paid for it, so the yield, the effective return on the current price, falls. When a 's price falls, that same fixed income stream becomes worth more relative to the lower price paid, so the yield rises.
This relationship exists because a 's is fixed at issuance and does not change over its life. If newly issued start offering a higher because interest rates have risen, an older paying a lower fixed becomes less attractive by comparison, so its price has to fall until its yield is competitive with what is currently available in the market. The opposite happens when rates fall, existing with higher fixed become more valuable, and their price rises.
This inverse relationship is the source of for any bondholder who might need to sell before maturity. It also explains why a bought at a premium above has a yield lower than its , and a bought at a discount below has a yield higher than its , the price paid and the fixed combine to determine the return an investor earns from that point forward.