Bond Prices and Yields Move Inversely
A bond pays a fixed coupon, so when its market price falls, the return a new buyer gets (its yield) rises. "Prices fall" and "yields spike" are the same event seen from two sides.
A bond has three numbers:
- Face value (par): usually $100. You get this back at maturity.
- Coupon rate: e.g. 5% of face value, so the bond pays a fixed $5 per year, no matter what.
- Market price: what the bond trades for today. This is the only number that moves.
Since the coupon is fixed in dollars, paying less for the same $5 means a higher return on your money:
| You pay | You receive each year | Yield (roughly) |
|---|---|---|
| $100 | $5 | 5.0% |
| $90 | $5 | 5.6% |
| $110 | $5 | 4.5% |
Why the price falls in the first place: market interest rates usually rise first. If new $100 bonds pay $6, nobody will pay $100 for an old bond paying $5. Its price has to drop until its yield matches the new bonds.