Bond price and yield: the basic link
A bond is a loan you make to a government or company. In return you get fixed interest payments, called coupons, and the face value (the amount borrowed) back at maturity, the end date. If you are new to bonds, start with What Bonds Are.
The coupon is fixed when the bond is issued. The market price is not. Bonds trade every day, and their prices move so that buyers earn a return in line with current interest rates.
That return is the yield. Price and yield move in opposite directions. When the price goes down, the yield goes up, and the reverse is also true.
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Bond yield meaning: the main measures
| Term | What it means |
|---|---|
| Coupon rate | Yearly interest as a share of face value. It is fixed at issue. |
| Current yield | Yearly coupon divided by today's price. |
| Yield to maturity (YTM) | The total yearly return if you buy at today's price, receive every coupon and hold to maturity. |
| Par, discount, premium | The price equals, is below, or is above face value. |
Yield to maturity is the measure traders quote most often. It sets the price, because a bond's price is the present value of its future payments. Each coupon and the final repayment is discounted at the market yield for the years until it is paid, and the results are added together. A higher yield means heavier discounting, which gives a lower price. For how compounding and discounting work, see Compound Interest.
Worked example with a coupon bond
The calculator on our Calculators page lets you enter your own figures. Here we follow the logic step by step.
- Issue. "Bond A" has face value F and a fixed coupon rate c. When it is issued, the market yield for similar bonds equals c, so Bond A sells at par, for F.
- Rates rise. Later, new bonds of the same risk and maturity are issued with a coupon above c. A buyer can get that higher income from a new bond, so nobody will pay F for Bond A.
- Price adjusts. Bond A's price falls below F, to a discount. The buyer now receives the old coupons plus a gain from the discounted price up to F at maturity. Together these give the new, higher market yield.
- Rates fall instead. If market yields drop below c, Bond A's fixed coupon looks generous. Its price rises above F, to a premium. The buyer loses part of that premium by maturity, which brings the yield down to the market level.
- Maturity. Whatever happens in between, the price moves back towards F as maturity gets close. The issuer repays face value, assuming it does not default.
This is why bond prices fall when yields rise. The coupon cannot change, so the price has to change instead.
Interest rates and bonds in Pakistan
Market yields on government debt, such as T-bills and Pakistan Investment Bonds, follow the State Bank of Pakistan's policy rate and what the market expects it to do next. The latest decision on record: SBP policy rate raised by 50 bps to 12% with effect from 27.10.2026 (MPC). Always check the current rate on the SBP's official site. Our page on SBP rates and the economy explains how these decisions work.
Inflation matters too. If investors expect higher inflation, they ask for higher yields, and existing bond prices fall. See Inflation and Savings for more.
Duration: how much a price reacts
Duration measures how sensitive a bond's price is to a change in yield. A rough rule: if a bond's modified duration is D, its price moves about D percent in the opposite direction for each percentage-point change in yield. The rule works best for small yield changes.
Three things drive duration:
- Longer maturity means higher duration. The money comes back later, so discounting at a new rate affects it more.
- Lower coupon means higher duration. More of the value sits in the final repayment, far in the future.
- Lower starting yield means somewhat higher duration.
For this reason, long-dated bonds with low coupons swing the most when rates change. Short bills barely move.
Convexity is the curve in the price-yield relationship. For ordinary bonds, prices rise a little more when yields fall than they drop when yields rise by the same amount.
Risks to keep in mind
- Selling before maturity. If you must sell after rates have risen, you can sell at a loss even on a safe issuer.
- Credit risk. If the issuer's finances weaken, its yield rises and its price falls.
- Leverage. Trading rate-sensitive products, such as bond futures or CFDs, with leverage multiplies these moves. Leveraged trading can lose money fast.
How much price movement you can accept depends on your risk tolerance and time horizon.
Frequent questions
Why do bond prices fall when interest rates rise?
New bonds then pay more. An older bond's fixed coupon is less attractive, so its price drops until its yield matches the market.
Does a falling price mean I lose money if I hold to maturity?
Not if the issuer pays in full. You still receive the coupons and face value. The loss is only realised if you sell before maturity.
What is the difference between coupon and yield?
The coupon is fixed interest based on face value. The yield is your return based on the price you actually pay.
Which bonds react most to rate changes?
Bonds with long maturities and low coupons, because they have the highest duration.
Where can I find terms like duration and YTM explained?
See the Trading glossary. For Pakistani government savings products, see National Savings schemes.