What a bond yield means — and why it moves opposite to price

A conventional bond promises a fixed schedule of payments: periodic coupons plus the face value at maturity. Those payments never change. What changes is the price someone will pay today to receive them — and the yield is simply the return implied by that price.

The inverse relationship is arithmetic, not sentiment

If a bond pays a fixed 100 units a year and trades at 2,000, the running yield is 5%. If demand pushes the price to 2,500, the same 100 units now represent 4%. Nothing about the bond changed. Falling prices raise yields and rising prices lower them, because the numerator is fixed.

Three yields worth distinguishing

1. Coupon yield: the annual coupon divided by face value. Fixed at issue and rarely useful for decisions.
2. Current yield: annual coupon divided by market price. Simple, but ignores any gain or loss at maturity.
3. Yield to maturity: the discount rate that equates all remaining cash flows to today's price. The standard comparison measure.

Duration: how much price moves

Duration measures a bond's price sensitivity to a change in yield. A longer-dated bond with a small coupon has a higher duration, so a given move in yields produces a larger swing in price. This is why long-dated government bonds can be volatile despite carrying almost no credit risk.

Reading the curve

Plotting yields against maturity gives the yield curve. An upward slope indicates investors demand more compensation for lending longer. When short-dated yields exceed long-dated ones the curve is inverted — historically a signal that markets expect policy rates to fall, usually because growth is expected to weaken. It is an expectation embedded in prices, not a forecast with a guaranteed outcome.