How are bond prices and yields related?

Bond prices and yields have an inverse relationship, meaning that as bond prices increase, bond yields decrease and vice versa.

When interest rates fall, bond prices rise because the fixed coupon payments of existing bonds become more attractive to investors than newly issued bonds that offer lower coupon payments. As a result, investors are willing to pay more for existing bonds, driving up their prices. Conversely, when interest rates rise, bond prices fall as the fixed coupon payments of existing bonds become less attractive than newly issued bonds that offer higher coupon payments. In this case, investors are less willing to pay a premium for existing bonds, driving down their prices.

The relationship between bond prices and yields is important for investors to consider when making investment decisions, as changes in interest rates can impact the value of their bond holdings.