If you’re someone who doesn’t own a college degree in finance and investment, understanding how and why the markets move in the ways they do can be quite confusing. Even if you do have some experience, you may understand how security prices move but may still have some questions as to why they move that way. Bond prices can be one of those confusing securities. Whereas most securities like stocks just quote a price, bonds have a price as well as a yield and those two figures move in opposite directions. How exactly does that work? Time for Bond Prices 101. The bond prices and yields that you see quoted on TV are the current market values if you were to buy a bond at that specific moment. Let’s say, for example, that you were to buy a government bond at par value (par value is often quoted with a price of 100 and means that the bond’s cost to you does not carry a discount or a premium) with a yield of 5%. If bond yields were to rise to 5.25%, the value of your bond would go down. Why? It’s because someone would be less interested in buying your 5% bond when they can get a bond at 5.25% in the open market. You would need to sell your bond at a discount to make up for the difference in yields. The same is true going the other way. If yields drop to 4.75%, your bond becomes more valuable because it carries a higher yield than what’s available in the market. It’s probably important to note that the yield on a bond that you purchase doesn’t change. It just constantly gets compared to current market rates which do change. If you purchase that par value bond at 5% and hold it until it matures, you’ll earn 5% annually guaranteed (assuming the bond doesn’t default, of course). It’s when you decide to sell it before maturity that the sale value can go up or down. Not so confusing once it’s explained, right? If you’re someone who doesn’t own a college degree in finance and investment, understanding how and why the markets move in the ways they do can be quite confusing. Even if you do have some experience, you may understand how security prices move but may still have some questions as to why they move that way. Bond prices can be one of those confusing securities. Whereas most securities like stocks just quote a price, bonds have a price as well as a yield and those two figures move in opposite directions. How exactly does that work? Time for Bond Prices 101. The bond prices and yields that you see quoted on TV are the current market values if you were to buy a bond at that specific moment. Let’s say, for example, that you were to buy a government bond at par value (par value is often quoted with a price of 100 and means that the bond’s cost to you does not carry a discount or a premium) with a yield of 5%. If bond yields were to rise to 5.25%, the value of your bond would go down. Why? It’s because someone would be less interested in buying your 5% bond when they can get a bond at 5.25% in the open market. You would need to sell your bond at a discount to make up for the difference in yields. The same is true going the other way. If yields drop to 4.75%, your bond becomes more valuable because it carries a higher yield than what’s available in the market. It’s probably important to note that the yield on a bond that you purchase doesn’t change. It just constantly gets compared to current market rates which do change. If you purchase that par value bond at 5% and hold it until it matures, you’ll earn 5% annually guaranteed (assuming the bond doesn’t default, of course). It’s when you decide to sell it before maturity that the sale value can go up or down. Not so confusing once it’s explained, right?