Bond Price
There is a reverse relationship between price and yield: when interest rates are rises, bond prices are falls and vice verse. The easiest way to understand this is to think in a logical manner about an investment. investor buy a bond for $100 that pays a certain interest rate (coupon). Interest rates go up. That same bond, to pay then-current rates, would have to cost less: maybe investor would pay $90 the same bonds if rates go up.
In addition to the fact that bond prices and yields are inversely related, there are also several other bond pricing relationships:
An increase in bond's yield to maturity leads to a smaller price decline than the price gain associated with a decrease of equal magnitude in yield. This physical process is referred as convexity. Prices of long term bonds lean to be more sensitive to interest rate changes than prices of short term bonds. For coupon bonds, as maturity increases, the sensitivity of bond prices to changes in yields increases at a decreasing rate.
Interest rate risk is reciprocally related to the bond's coupon rate. Prices of high coupon bonds are less sensitive to fluctuations in interest rates than prices of low coupon bonds. Zero coupon bonds are the most sensitive. The sensitivity of a bond's price to a varies in yield is inversely related to the yield at maturity at which the bond is selling now.
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