How price, coupon, maturity and yield are related
Prices move opposite to yields. For the same yield change, lower-coupon and (usually) longer-maturity bonds move more in percentage terms, and a fall in yield lifts the price more than an equal rise cuts it. If the yield never changes, every bond's price drifts to par by maturity.
Before this: Pricing a bond from its yield to maturity
On the exam
- Identify the relationships among a bond’s price, coupon rate, maturity, and yield-to-maturity
Identify the relationships among a bond's price, coupon rate, maturity and yield to maturity. Expect a question on which bond is most sensitive, one on pull to par, and one on the asymmetry of price changes (convexity).
How deeply to learn each part
- Know the idea
- Understand it in general. It frames other topics, but you will not calculate with it.
- Use it
- Understand it well enough to solve a question with it. Recognize when it applies.
- Memorize
- Learn it by heart. The exam will not give it to you.
You know this one. The full lesson is folded away. The takeaways, formulas and checkpoint below are your quick refresher, and the checkpoint is a fair test of whether you still do.
You tested strong here. The full lesson is folded away. The takeaways, formulas and checkpoint below are your quick refresher, and the checkpoint is a fair test of whether you still know it.
How is a bond’s price linked to its yield?
A bond’s price is the present value of fixed cash flows, so a higher discount rate means a lower price. This is the inverse relationship between price and yield. How far the price moves depends on the bond’s coupon, its maturity and the direction of the move.
- Yield to maturity Memorize price moves the opposite way
- Convexity effect a fall in yield lifts the price more than an equal rise cuts it
-
- Coupon rate Memorize coupon effect: a lower coupon means a bigger percentage move
- Time to maturity Memorize maturity effect: longer usually means a bigger move
- The passage of time Memorize pull to par at a constant yield
Try this 0 of 3
- In the coupon effect, raise the yield by exactly 1 point
- In the convexity view, move the yield 1 point up and 1 point down
- On Pull to par, find the premium bond's price with 1 year left
- 10-year 6%
- 10-year zero
10-year zero moves most: −4.60% for +50 bps.
Show working
| Bond | Price at 6% | At 6.5% | Change |
|---|---|---|---|
| 10-year 6% | 100.000 | 96.406 | −3.59% |
| 10-year zero | 55.839 | 53.273 | −4.60% |
10-year 6%: a 1-point fall in yield +7.72%, a 1-point rise −7.02%.
10-year zero: a 1-point fall in yield +9.94%, a 1-point rise −8.96%.
Percentage change = new price ÷ starting price − 1. For example 10-year 6%: 96.406 ÷ 100.000 − 1 = −3.59%.
- 2NDCLR TVMwith P/Y set to 1
- 10N6.5I/Y6PMT100FV
- CPTPV−96.406
2ND second function (the shifted label above a key) · CLR TVM clear the time value of money keys · N number of periods · I/Y interest rate per year (per period when P/Y is 1) · PMT payment · FV future value · CPT compute · PV present value
- fCLEAR FIN
- 10n6.5i6PMT100FV
- PV−96.406
f gold shift key · CLEAR FIN clear the financial registers · n number of periods · i interest rate per period · PMT payment · FV future value · PV present value
Why do low-coupon bonds move more?
The coupon effect : for bonds with the same maturity, a lower coupon means a larger percentage price change for the same change in yield. A low coupon leaves more of the bond’s value in the final payment, the cash flow furthest away and most affected by a change in the discount rate.
Why do long-maturity bonds move more?
The maturity effect : for bonds with the same coupon, a longer maturity usually means a larger percentage price change. More of the cash flows sit far away, where a change in the discount rate compounds for longer.
Exam tip Combine the two effects. Lowest coupon and longest maturity make the most sensitive bond. A zero-coupon bond is the most sensitive for its maturity.
Go deeper When the maturity effect can fail
For a long, low-coupon bond trading at a deep discount, a longer maturity can occasionally mean a smaller percentage price change: past a certain point, adding years no longer pushes the weight of the cash flows further out. The case is rare. It never applies to zero-coupon bonds, par bonds or premium bonds, and the exam treats longer maturity as more sensitive unless it says otherwise.
Why do prices rise more than they fall?
The convexity effect : for the same size of yield change, the percentage price gain when yields fall is larger than the percentage loss when yields rise. The price–yield curve bends toward the origin instead of following a straight line. Every row in the tables above shows it (for the 20-year bond, +14.88% against −12.46%).
A bond's price moves from 100.00 to 104.38 when its yield changes. The percentage price change is closest to:
104.38 ÷ 100.00 − 1 = 4.381%
Percentage price change4.38%
- 104.381÷100−1=0.04381
- 104.381ENTER100÷1−0.04381
ENTER enter (on the HP, puts the number on the stack)
Go deeper Where this goes next
Duration is one number that captures the coupon and maturity effects: it estimates the percentage price change for a small yield change. Convexity measures the curvature that causes the asymmetry. Both come later in Fixed Income, and neither is needed here: you only need to recognize the direction and rank the bonds.
Where does the price go if the yield never changes?
Time alone moves a bond’s price. As maturity approaches, the remaining cash flows shrink in number and the price is pulled to par, provided the issuer does not default. This is the constant yield-price trajectory , and the pull itself is called pull to par .
- Discount bond Memorize price rises toward par
- Par bond Memorize price stays at par
- Premium bond Memorize price falls toward par
Go deeper Pull to par is not a gain you can bank for free
The price drift is already built into the yield: a discount bond’s YTM includes the gain as the price rises to par, and a premium bond’s YTM includes the loss as it falls. If the yield stays unchanged, the gain or loss arrives as scheduled. If the yield moves, the price moves with it.
Memorize this
MemorizeWhich bond is more sensitive
| Compare | More sensitive to a yield change | Why |
|---|---|---|
| Same maturity, different coupon | Lower coupon | More of the value sits in the last payment |
| Same coupon, different maturity | Longer maturity (almost always) | More distant cash flows |
| Rise vs equal fall in yield | The fall (price gain is bigger) | Convexity |
Memory hook Value far in the future is shaky. Zero coupon and long maturity push the value furthest away.
Know it cold A zero-coupon bond is the most sensitive bond of its maturity. Exception: some long, low-coupon, deep-discount bonds; never zeros, par or premium bonds.
MemorizePull to par
Memory hook Everything ends at 100: discount bonds climb, premium bonds slide.
Know it cold At an unchanged yield the price moves to par as maturity approaches, if the issuer does not default.
- Yield to maturity Memorize price moves the opposite way
- Convexity effect a fall in yield lifts the price more than an equal rise cuts it
-
- Coupon rate Memorize coupon effect: a lower coupon means a bigger percentage move
- Time to maturity Memorize maturity effect: longer usually means a bigger move
- The passage of time Memorize pull to par at a constant yield
- Discount bond Memorize price rises toward par
- Par bond Memorize price stays at par
- Premium bond Memorize price falls toward par
Quick example
A 9-year 5% bond at par falls to 95.85 when its yield rises to 5.6%. 95.85 ÷ 100 − 1 = −4.15%.
- 95.847÷100−1= −0.0415
- 95.847ENTER100÷1− −0.0415
ENTER enter (on the HP, puts the number on the stack)
Quick example
A 10-year 6% bond priced at a constant 5% yield is 107.72 today and 106.46 two years later (8 years left). Same formula, fewer periods.
- 2NDCLR TVM with P/Y set to 1
- 8N5I/Y6PMT100FV
- CPTPV −106.4632
2ND second function (the shifted label above a key) · CLR TVM clear the time value of money keys · N number of periods · I/Y interest rate per year (per period when P/Y is 1) · PMT payment · FV future value · CPT compute · PV present value
- fCLEAR FIN
- 8n5i6PMT100FV
- PV −106.4632
f gold shift key · CLEAR FIN clear the financial registers · n number of periods · i interest rate per period · PMT payment · FV future value · PV present value
How it is asked
-
Which bond is most sensitive?
8-year 5%, 8-year 1% or 4-year 1%. Which falls most when yields rise 1 point?
Lower coupon and longer maturity: the 8-year 1%. The higher coupon (A) and shorter maturity (C) are the traps.
-
Price after a yield fall
9-year 5% bond at par, yield falls to 4.4%. New price?
N = 9, I/Y = 4.4, PMT = 5 gives 104.38. Mirroring the fall for a rise (104.15) ignores convexity.
-
Pull to par
Premium bond, constant yield, no default. Price over time?
Falls toward par. Staying put or rising is the trap.
-
Gain or loss for a ±1 point move
Which is larger, the gain from a 1-point fall or the loss from a 1-point rise?
The gain (convexity).
Exam traps
- Picking the higher-coupon bond as more sensitive. The lower coupon moves more.
- Thinking a premium bond's price stays above par until maturity at a constant yield. It falls to par.
- Treating price changes for rises and falls in yield as symmetric. The gain from a fall is larger.
- Applying the maturity effect to a par or premium bond or a zero without checking. It fails only for some long, low-coupon, deep-discount bonds.
Checkpoint
3 exam-style questions. About 90 seconds each.
1Which bond's price is most sensitive to a 1-point change in yield?
2A 10-year, 4% annual-coupon bond trades at par. If its yield falls to 3.5%, its price per 100 of par is closest to:
3A premium bond's yield stays constant until it matures, and the issuer does not default. Over time its price will:
Key takeaways
- Price and yield move in opposite directions.
- Lower coupon or longer maturity: larger percentage price changes.
- Gains from falling yields exceed losses from equal rises: convexity.
- At a constant yield, prices are pulled to par.
Quick example
A 9-year 5% bond at par falls to 95.85 when its yield rises to 5.6%. 95.85 ÷ 100 − 1 = −4.15%.
- 95.847÷100−1= −0.0415
- 95.847ENTER100÷1− −0.0415
ENTER enter (on the HP, puts the number on the stack)
Quick example
A 10-year 6% bond priced at a constant 5% yield is 107.72 today and 106.46 two years later (8 years left). Same formula, fewer periods.
- 2NDCLR TVM with P/Y set to 1
- 8N5I/Y6PMT100FV
- CPTPV −106.4632
2ND second function (the shifted label above a key) · CLR TVM clear the time value of money keys · N number of periods · I/Y interest rate per year (per period when P/Y is 1) · PMT payment · FV future value · CPT compute · PV present value
- fCLEAR FIN
- 8n5i6PMT100FV
- PV −106.4632
f gold shift key · CLEAR FIN clear the financial registers · n number of periods · i interest rate per period · PMT payment · FV future value · PV present value
All Fixed Income formulas, every lesson
Practice exam-style questions on Bond Valuation: Prices and Yields
Questions about this lesson?
Where this comes back
- Interest Rate Risk and Return Fixed Income
- Modified Duration, Money Duration and PVBP Fixed Income
- Convexity and Portfolio Duration Fixed Income
Questions candidates ask
Why are zero-coupon bonds more sensitive to interest rates?
All their value comes from the single payment at maturity, which is discounted the most. Coupon bonds return part of the value earlier, so changes in the discount rate affect them less.
Do longer bonds always fall more when rates rise?
Almost always. The rare exception is some long, low-coupon bonds trading at a deep discount, where the effect can reverse. For par, premium and zero-coupon bonds the longer bond always moves more.
What does pull to par mean?
As maturity approaches, a bond's price moves toward its par value if the yield does not change and the issuer does not default. Discount bonds rise and premium bonds fall.
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