bond prices and yields
Here is a puzzle that trips up almost everyone at first: when bond prices go up, bond yields go down, and when prices fall, yields rise. They move in opposite directions, always. Once you see why, a huge amount of the financial news suddenly makes sense — including the cryptic phrase 'yields rose today, so bond prices fell'.
The key is that a bond's future payments are fixed at issue. Take a bond that will pay $50 a year and return $1,000 at the end. The yield is simply the return you get expressed as a percentage of what you pay for the bond now. If you pay $1,000, your yield is 5% ($50 on $1,000). But suppose new bonds now offer 10%, so nobody will pay full price for your old 5% bond; its market price drops to, say, $500. Now whoever buys it still collects the same fixed $50 a year — which on a $500 price is a 10% yield. The fixed payments did not change; the lower price pushed the yield up. That is the whole mechanism: price and yield are two ways of describing the same deal, and they are linked like a seesaw.
This inverse seesaw is why rising interest rates hurt existing bondholders: when new bonds pay more, the price of old, lower-paying bonds must fall so their yields can match. It explains why 'safe' long-term bonds can still lose value, why central-bank rate decisions ripple instantly through bond markets, and why the yield is the number investors actually compare across bonds, not the coupon printed on them. The most quoted measure, yield to maturity, rolls the coupons and the price gain or loss into a single annual return if you hold the bond to the end.
You hold a bond paying a fixed $50 a year, bought at $1,000 (a 5% yield). Then market interest rates jump and new bonds pay 10%. To sell yours, you must drop the price to around $500, because at that price the unchanged $50 a year is a 10% yield — matching the new bonds. Higher rates pushed your bond's price down.
Fixed payments mean a lower price automatically raises the yield, and vice versa.
The 'yield' you hear quoted is yield to maturity, which assumes you hold the bond until it matures. Sell early at a different price and your actual return can differ — the quoted yield is not a guarantee.