Relationship between bond price and yield

One of the questions that many people have is what is the relationship between the bond price and the yield that is experienced as a result.

Well the fact is that basically there is a fundamental relationship here, and it goes a little like this:

as the yield rises, the price of a bond will fall - this is a key relationship to grasp.

This can be proved by pumping numbers into the calculations of the flat yield or the GRY method.

One point to note is the limitation with regard the yield in terms of measuring predicted return, because it assumes that interest rates remain constant during the period oand that any coupon receipts may be reinvested at the same rate as the yield.

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