Answer
Bond prices tend to fall when yields rise because a bond promises a set of future cash payments, and a higher required return makes those payments worth less today. For the same fixed-rate bond, with the same promised cash flows, price and yield to maturity move in opposite directions by construction.
A bond’s coupon is the interest payment written into the contract. Its yield is different. Yield tells you the return implied by the price you pay for those future payments.
If investors can get a higher return from newly issued bonds of similar risk and maturity, an older bond with a lower fixed coupon becomes less attractive at its old price. Its market price tends to fall until the return available to a new buyer is competitive again.
This is why financial headlines often describe bond prices and yields as a seesaw. The image is useful, but it needs a boundary. It works cleanly when we are talking about the yield and price of the same fixed-cash-flow bond. It becomes less reliable when a headline compares a corporate bond with a government yield, a floating-rate bond with a fixed-rate bond, or a bond whose cash flows can change.
Mechanism
The first mechanism is discounting.
A bond is a stream of future cash payments. Buyers compare those payments with the return available elsewhere for similar time and risk. The rate used to translate future cash into today’s value is called a discount rate.
When the required yield rises, each future payment is discounted more heavily. Its present value falls. Add those lower present values together, and the bond’s market value tends to be lower.
The second mechanism is competition with newly issued bonds.
Suppose an existing bond keeps paying its original coupon while new bonds of similar quality are issued at higher yields. A buyer has little reason to pay the old price for the older bond if a new bond offers a better return. The older bond’s price adjusts downward. That lower purchase price raises the return a new buyer can earn from the old bond.
The third mechanism is the way yield to maturity is calculated.
Yield to maturity is the discount rate that makes the present value of a bond’s promised coupon and principal payments equal its market price. When those cash flows are fixed, lowering the price produces a higher calculated yield, and raising the price produces a lower calculated yield.
That point matters because headlines can make it sound as if yield is a separate object that pushes price around. In practice, market participants change the price they are willing to pay as required returns change, and the quoted yield is then the return implied by that price.
Sensitivity also differs across bonds. A bond with cash flows far in the future tends to react more to a change in required yield than a bond whose cash flows arrive sooner. Duration is the standard measure used to describe that sensitivity. Coupon size, maturity, and embedded options can all affect how strongly price responds.
A simple example
Use round figures chosen only for clarity. They are hypothetical and are not market quotes.
Imagine a bond that pays a $50 coupon and returns $1,000 of principal one year from now. The total cash payment is $1,050.
If the required yield is 5%, paying $1,000 today gives a future payment of $1,050, which matches that required return.
Now suppose comparable bonds offer a 6% required yield while this bond’s promised payment stays at $1,050. A buyer would no longer want to pay $1,000 for it. Discounting $1,050 at 6% gives a price of about $991.
The coupon did not change. The principal repayment did not change. The price changed because the market’s required return changed.
That lower price is also what makes the old bond’s yield rise for a new buyer. The buyer pays less today for the same future cash payment. Price and yield therefore move in opposite directions for the same fixed set of cash flows.
When this relationship breaks
The strict price-yield relationship does not really break when yield means the yield to maturity of the same option-free, fixed-rate bond and the promised cash flows do not change. The apparent breaks come from changing what is being compared.
Credit risk is one source. A corporate bond’s yield can be thought of as a government benchmark yield plus a credit spread, which is extra yield investors demand for taking issuer risk and other market risks. The benchmark can fall while the credit spread rises by more. In that case, the corporate bond’s total required yield can rise and its price can fall even though government yields are falling.
The financial crisis of 2008 provides a clear example. The Federal Reserve reported that Treasury yields dropped while rates on investment-grade and speculative-grade corporate bonds rose sharply. Corporate yield spreads moved above previous record highs. Falling Treasury yields therefore did not translate into rising prices across the corporate bond market.
Changing cash flows are another source. Floating-rate bonds reset their coupons, so a rise in market rates can be partly absorbed by higher future payments instead of by a large price decline. Inflation-linked bonds can have principal or coupon payments tied to an inflation measure. Callable bonds contain an issuer option that changes how investors value future cash flows when rates move.
There is also a language problem. “Yields rose” may refer to a government yield, a corporate yield, a yield index, or the yield on the exact bond whose price is being discussed. Those are not interchangeable.
What to watch
Start by identifying the yield in the headline. Is it the yield to maturity of the same bond, a government benchmark, a central-bank policy rate, or a broad market index? The inverse relationship is strongest when price and yield belong to the same fixed-rate bond.
Next, separate the benchmark rate from the credit spread. For a corporate bond, a lower government yield does not guarantee a higher bond price if investors are demanding much more compensation for credit risk.
Then check whether the cash flows are fixed. Floating coupons, inflation adjustments, calls, puts, or other embedded features can change the usual response.
Finally, look at maturity and duration. Two bonds can face the same change in required yield and still have very different price moves because their cash flows arrive at different times.
The clean rule is narrow: for a fixed set of promised cash flows, a higher yield to maturity corresponds to a lower price. Market headlines often use broader versions of that rule. The useful habit is to ask whether the yield, the bond, and the cash flows being compared are actually the same.