Lesson 4 of 5 · 14 min
How coupon, maturity and yield drive bond prices
Prices move inversely with yields, and the size of the move depends on the coupon (lower → bigger), the maturity (longer → usually bigger) and the direction (falls in yield lift prices more than equal rises cut them).
In short
- Inverse relationship: higher YTM → lower price, and vice versa.
- Coupon effect: for the same maturity, the lower the coupon, the larger the percentage price change for a given yield change.
- Maturity effect: generally, the longer the maturity, the larger the percentage price change. Rare exceptions: long-term, low-coupon (not zero-coupon) bonds trading at a discount.
- Constant-yield price trajectory: with an unchanged yield, discount bonds rise and premium bonds fall toward par (pull to par).
- Convexity effect: for the same size of yield change, the percentage price rise exceeds the percentage price fall.
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