Yield vs Price in Bonds: How Valuation Explains Market Movements

When investors first begin to invest in bond products, they often assume the coupon rate represents the return they will earn. But bond markets operate differently. A bond’s true return depends on the price paid, and that return is expressed through yield. This is why bond valuation matters—it connects bond cash flows with price and yield, helping investors understand why bond prices rise and fall.

Bond valuation is not just a calculation. It is the framework that explains why bonds trade above or below their face value and why interest rate changes can affect bond portfolios.

Bond Pricing Is Based on Cash Flows

A bond generates:

• coupon payments at regular intervals

• repayment of principal at maturity

Because these payments are fixed, the bond’s fair value depends on how much investors value those payments today. That is done through discounting.

The present value formula is:

PV = CF ÷ (1 + r)ⁿ

Where r is the discount rate.

Understanding Coupon Rate vs Yield

Coupon rate is fixed. Yield is market-based.

A ₹100 bond with 10% coupon always pays ₹10 per year.

But if the bond is purchased at ₹110, the investor pays more to receive the same ₹10 coupon. This reduces yield.

If the bond is purchased at ₹90, the investor pays less to receive the same ₹10 coupon. This increases yield.

So yield depends on price.

Why Bond Prices Fall When Interest Rates Rise

Interest rates determine what investors demand as return.

If RBI rates rise, new bonds issued in the market offer higher coupons. Existing bonds become less attractive because their coupons are lower than the market.

To compensate, their prices fall so that investors buying them still earn competitive yields.

This is the inverse relationship:

Prices fall → yields rise
Prices rise → yields fall

Premium, Discount, and Par Explained

Bond valuation explains three pricing outcomes:

• Premium: coupon rate > market yield

• Discount: coupon rate < market yield

• Par: coupon rate = market yield

A bond trading at premium is not “better.” It simply pays higher coupons than market alternatives. A bond trading at discount is not “bad.” It may simply be priced lower because market yields have risen.

Why Maturity Matters in Price Sensitivity

Long-term bonds have greater sensitivity to interest rate changes because their cash flows extend far into the future. When discount rates rise, distant cash flows lose significant value.

Short-term bonds are less sensitive because their maturity proceeds are near.

This is why bond investors often choose different maturity strategies depending on interest rate expectations.

Bond Price Converges to Face Value

One important concept is convergence.

As maturity approaches, a bond’s market price gradually moves closer to face value. The closer a bond gets to maturity, the less uncertainty remains, and the more predictable the final payout becomes.

This explains why long-term bonds show more price fluctuation than bonds nearing maturity.

Smarter Yield Comparison

For retail investors, understanding price-yield relationships can be difficult, especially when bonds trade in secondary markets. Altifi simplifies this by offering structured bond listings with yield visibility, tenure, coupon details, and pricing comparisons. This allows investors to evaluate whether yields compensate for maturity and risk, rather than relying only on headline coupon rates.

Conclusion

Bond valuation is the link between cash flows, yield, and price. It explains why bond prices move when interest rates change and why coupon rate is not the same as return. Investors who understand these mechanics can make more disciplined decisions, especially during rate cycles.

With bond access becoming more transparent, investors can compare yields and invest online with greater confidence and clarity.