Bond Yield/ YTM and its relationship with Bond Price What is a Bond? • A bond is a fixed income instrument that represents the loan made by the investor to the borrower. What are Bond Yields? • It is the return and investor realizes on the bond. • A bond's yield is the return an investor expects to receive each year over its term to maturity. • But the return is not fixed it changes with the price of bond. • Suppose the value of 10 year bond of rs 100 is and its coupon payment is 10. • Buyer will give rs 100 and will get 10 rs as coupon payment every year. For the next 10 years. • After 10 years buyer will also get 100 rs from the borrower. Why bond yield changes? • If GDP of a country is slowing down. • Investor will pull their money from share market and put in bonds. • Because of this demand for bond increases and bond prices go up. • Since demand for bond has increased the person who has bought bond for Rs 100 will sell it for Rs more than 100. • Someone buys it at 110 Rs. • Now his yield will not be 10% it will be less than 10%. • In the similar way when economy is doing good demand for bond may decrease and hence bond yield will start increasing.
