Understanding Bond Yields
A bond's yield is not its coupon rate — it's the total return you actually earn given today's price. When a bond trades at a discount (below face value), the yield exceeds the coupon because you also gain the difference at maturity. When it trades at a premium, the yield falls below the coupon because you lose that premium over time.
Current yield is the quick measure: annual coupon ÷ current price. Yield to maturity (YTM) is the complete picture — it accounts for the coupon payments, the capital gain or loss at maturity, and the time value of money. YTM is the internal rate of return of all cash flows if you hold to maturity.
Duration measures interest rate sensitivity. A bond with 7-year duration loses roughly 7% of its price for every 1-percentage-point rise in rates. Longer maturity and lower coupon both increase duration. This is why long-dated Treasuries swing dramatically when rate expectations shift — even if the coupon itself is stable.
Price vs Yield Relationship
Bond price and yield move in opposite directions. If you buy a 5% coupon bond at par ($1,000) and rates rise to 7%, your bond is now worth less than $1,000 because new bonds pay more. The market discounts your bond until its effective yield matches the new rate. This inverse relationship is the foundation of fixed-income portfolio management.