What Is a Bond? Prices, Yields and the Rule That Runs Finance

Foundations

A bond is a loan you can buy. A government or company borrows money and promises two things in return: regular interest payments (the coupon) and repayment of the full amount (the principal) on a fixed date (maturity). Bonds are how governments fund deficits and companies fund themselves at scale, and the bond market, far larger than the stock market, is where the price of money is really set.

The golden rule: prices and yields move in opposite directions

This is the single most important mechanic in finance. A bond’s coupon is fixed when it is issued. If new bonds start paying 5 per cent and you hold an old one paying 3 per cent, nobody will buy yours at full price; its price must FALL until its fixed payments equal a 5 per cent return for a new buyer. Rates up, bond prices down. Rates down, bond prices up. When you read that “yields rose”, it means bond prices fell, and someone holding them lost money on paper.

What a yield actually is

The yield is the return you would earn buying the bond at today’s price and holding it to maturity. It bundles three things: expected central bank rates over the bond’s life, expected inflation (which erodes fixed payments), and a premium for risk and time. That is why the 10-year Treasury yield is watched like a heartbeat: it is the market’s live verdict on growth, inflation and policy, all in one number.

Why bond moves hit everything else

Government bond yields are the “risk-free” benchmark against which every other asset is priced. When yields rise, mortgages and corporate borrowing reprice off them, and shares face stiffer competition from safe returns, pressuring valuations. Sharp bond moves are also a warning system: sudden yield spikes have triggered several of the market shocks in our archive. Learn to read the bond market and most other market stories start making sense.