What occurs to the yield of a bond when its price increases?

When the price of a bond increases, its yield decreases. This relationship is fundamental to bond pricing and yield calculation. The yield of a bond, often expressed as the yield to maturity or current yield, reflects the income generated by the bond relative to its price.

As the bond's price rises, the amount of interest (or coupon payment) that the bondholder receives does not change; it remains fixed based on the terms of the bond. Therefore, if you pay more for the same bond while receiving the same fixed payments, the percentage return on your investment, or yield, effectively decreases. This inverse relationship is crucial for understanding bond investments and market behavior.

In summary, increased bond prices lead to decreased yields, reinforcing the principle that higher prices for fixed-income securities result in lower returns. This concept is vital for investors making decisions based on interest rates, market conditions, and capital preservation.