The Relation between Bond Prices and Yields
§Consider a 2 year, 10% coupon bond
with a $1000 face
value. If the bond yield is 8.8%, the price is 50 + 1000/(1.044)4 = 1021.58.
§Now suppose the market bond yield
drops to 7.8%. The market price is now given by 50 + 1000/(1.039)4 = 1040.02.
§As the bond yield drops, the bond
price rises, and
vice-versa.
