A bond yield is a way of expressing the return investors require from a bond. The exact calculation depends on the yield measure, but the core idea is simple: the bond's market price and promised cash flows together determine its yield.
How it works
For a fixed-rate bond, the coupon payments are set in advance. If investors push the bond's price higher, those same payments represent a lower return relative to the price paid, so the yield falls. If the price falls, the yield rises.
This inverse price-yield relationship is one of the most important pieces of bond-market intuition. Longer-maturity bonds are generally more sensitive to changes in yields than very short-maturity bonds.
Why it matters
Government-bond yields influence mortgage rates, corporate borrowing costs, equity valuations, currency markets, and the discount rate investors use to value future cash flows.
Short-term yields are especially sensitive to expected central-bank policy, while longer-term yields also reflect growth, inflation, term premium, and supply-demand conditions.
A simple market example
If a central-bank announcement makes investors expect lower interest rates in the future, they may buy government bonds. Bond prices can rise and yields fall, even though the central bank has not yet cut its policy rate.
Common mistakes
Saying bond yields rose, so bond prices rose. For ordinary fixed-rate bonds, the relationship is generally the opposite.
Treating every yield move as a pure central-bank signal. Inflation, fiscal expectations, issuance, and risk sentiment also matter.
Frequently asked questions
Why do bond prices and yields move in opposite directions?
Because a bond's promised cash flows are mostly fixed. Paying a higher price for the same cash flows lowers the return implied by that price.
Is the coupon rate the same as the yield?
No. The coupon is set when the bond is issued; market yield changes as the bond price changes.
Why do stock investors watch government-bond yields?
Because yields affect financing costs and the discount rate used to value future corporate earnings.
Educational content only. Definitions describe common market usage and may vary by jurisdiction, instrument, or institution.