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  • The Relationship Between Yields and Prices

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    Luan
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    The document discusses the relationship between bond yields and prices. It explains that yields fall when bond prices rise, and vice versa, due to their inverse relationship. Specifically, it states that yields fall when bond quality rises or risk aversion decreases, leading to increased demand and higher prices. Conversely, yields rise when quality falls or risk aversion increases, reducing demand and lowering prices. The document also notes that yield-to-maturity is a more complete measure of bond return that factors in coupon reinvestment and gain/loss at maturity.

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    The document discusses the relationship between bond yields and prices. It explains that yields fall when bond prices rise, and vice versa, due to their inverse relationship. Specifically, it states that yields fall when bond quality rises or risk aversion decreases, leading to increased demand and higher prices. Conversely, yields rise when quality falls or risk aversion increases, reducing demand and lowering prices. The document also notes that yield-to-maturity is a more complete measure of bond return that factors in coupon reinvestment and gain/loss at maturity.

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    © All Rights Reserved
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    11 views1 page

    The Relationship Between Yields and Prices

    Uploaded by

    Luan
    The document discusses the relationship between bond yields and prices. It explains that yields fall when bond prices rise, and vice versa, due to their inverse relationship. Specifically, it states that yields fall when bond quality rises or risk aversion decreases, leading to increased demand and higher prices. Conversely, yields rise when quality falls or risk aversion increases, reducing demand and lowering prices. The document also notes that yield-to-maturity is a more complete measure of bond return that factors in coupon reinvestment and gain/loss at maturity.

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    © All Rights Reserved
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    FOR INFORMATION PURPOSES ONLY

    The relationship between yields and prices


    A bond’s interest rate, or coupon, determines the amount of income earned annually from holding the bond. A bond’s current yield reflects that income as a percentage of the bond’s price. It
    changes constantly with bond prices.
    Example: A £1,000 bond with a 3% coupon pays £30 in income each year (£1,000 x 0.03). If the bond’s price rises to £1,100, the yield falls to 2.73% (£30 / £1,100). Thus, when price goes up, yield
    goes down — and vice versa. This is known as an inverse relationship.

    YIELDS FALL WHEN...

    QUALITY RISES SO...

    RISK AVERSION FALLS SO...


    YIELDS RISE WHEN...
    DEMAND INCREASES WHICH...
    QUALITY FALLS SO...
    DRIVES PRICES UP...
    RISK AVERSION RISES SO...

    DEMAND FALLS WHICH...

    DRIVES PRICES DOWN...

    When yield is referenced, what’s typically meant is yield-to-maturity – a more complete measure of the income from a bond. Yield-to-maturity factors in reinvestment of coupons and any gain or loss on a bond as if it were
    held until maturity. As with current yield, yield-to-maturity is expressed as a percentage of the bond’s current price.

    Yield matters
    It is customary for bond investors to talk about bond yields (meaning yields-to-maturity), rather than bond prices. For example, market reports will tend to say ‘bond yields rose on Friday’, rather than ‘bond prices fell’. The focus
    on yield allows investors to compare bonds with different coupons and different maturities more easily, as well as to compare them with savings accounts, inflation and income from other asset classes.
    Rising bond yields do not mean that coupons are increasing (coupons are set when bonds are issued and do not usually change during the life of the bond), but that prices are falling – bad news for current investors. It’s
    important to remember, though, that bonds continue paying income even as their prices fluctuate. If prices rise, investors achieve a capital gain in addition to the income. If prices fall, the capital loss is cushioned by the income.

    FOR INFORMATION PURPOSES ONLY


    This document has been produced for illustrative purpose only and as such the views contained herein are not to be taken as an advice or recommendation to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader and ratings should not form the sole basis of an
    investment decision. This material does not contain sufficient information to support an investment decision and investors should ensure that they obtain all available relevant information before making any investment. The value of investments and the income from them can fall as well as rise and investors may not get back the full amount
    invested. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co and its affiliates worldwide. Issued in the UK by JPMorgan Asset Management (UK) Limited which is authorised and regulated by the Financial Conduct Authority. Registered in England No. 01161446. Registered address:
    25 Bank St, Canary Wharf, London E14 5JP, United Kingdom. 4d03c02a80031d04 LV–JPM30252 | 03/16

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