There can be multiple reasons for Bond Prices and Yields Moving in Opposite Directions. It can be a bit confusing for you if you are new to bonds. Let us learn about the key essentials before understanding the above.
Bond prices and yields move in opposite directions because the bond market is driven by the supply and demand for investment money. In simple terms, if investors in the market do not show interest in buying bonds, the price of bonds goes down and the interest rate rises. On the other hand, in case there is more demand coming from investors to buy Debt mutual funds bonds, the issuer does not need to raise yields on bonds to attract investors to buy the issued bonds. The prices of bonds go down when bond yields go up, and prices go up when bond yields go down. Experts advise you to avoid making investments in bonds having long-term maturity when the rate of interest is expected to rise. The rising interest rate results in a loss of principal.
For example, a bond with a face value of ₹1000 is allotted at a 9% coupon
If you buy the bond when the price goes to ₹1100, the return will be a 9% coupon. You are paying here more amount (premium) to get the same returns. Therefore, the actual return (yield to maturity), decreases as compared to the time it was allotted.
In the other scenario, if you buy the same bond when the price goes to ₹900, the return will be a 9% coupon. Now, you are paying less (i.e., you get it at a discounted price) to earn the same returns. Thus, the actual return (yield to maturity), becomes more as compared to the time the bond was first allotted.
What is bond yield?
Bond yield is a key factor, and no investor should ignore it. It is better to have a better understanding of bond yield to avoid disappointment. what is bond yield refers to the fixed return you as a bondholder realizes on your investment made in bonds? You can buy a bond at a premium, for more than its face value, or less than its face value, at a discount.
What is bond current yield?
If you divide bond’s coupon rate by its market price, it will help you derive the current bond yield.
What is a bond in finance?
Bonds is a popular product in the fixed income segment. The attractive feature and advantages make it a highly sought investment instrument. A bond in finance is a debt security that guarantees a coupon payment at a fixed interval and return of face value at the end date of maturity. The coupon i.e., interest is paid monthly, yearly, quarterly, or half yearly.
If you are also trying to know what is a bond in finance, let me tell you that is a debt security where an issuer is liable to pay a bondholder fixed interest along with capital at maturity. The entity issuing bonds is known as an issuer and an investor buying bonds is termed as a bondholder. A bond can have different maturity and can be chosen based on personal investment needs. Bonds on the basis of their features, advantages and disadvantages are divided into varied types. You can explore online or use varied sources to expand your knowledge about bonds, bond interest rate, and more. The more you read the better will be your understanding about the demanding financial instrument.
Example of fixed interest income, Rakesh buys a Rupee 10,000 bond at a fixed coupon rate of 5%, having a maturity of 2 years. In a span of 1 year, he will receive a rupee 500 coupon/bond yield. In 2 years, he will receive 10,500 back when his bond matures that will include his principal valuing Rupee 10,000.
What is the meaning of bond?
The above-detailed information will let you have answer to one of the commonly asked question – What is the meaning of a bond? Today not only the institutional investors but also retail investors prefer investing in the varied types of bonds. It has emerged as a dependable instrument yielding higher returns, liquidity, periodic returns, total protection of your capital, and the facility to choose bonds having different maturities.
Know bond interest rate
A bond interest rate is important as a bond is a fixed-income investment avenue issued by private entities and governments. The return on a bond decrease in real terms if there is increase in the inflation rate and vice versa. If you are planning to buy bonds, do consider the bond interest rate for the desired earnings.
Investing in bonds can not only help you earn better returns on your investment but also safeguard your capital. But make sure you invest responsibly. There are bonds trending in market that can attract you. If you wish to earn a fixed rate of the coupon as income at a predefined period, buying bonds can be an ideal choice for you.