What happens to bond yields when bond prices change?

When bond prices change, yields react in a specific manner due to the inverse relationship between bond prices and yields. When bond prices decrease, it indicates that the demand for those bonds has declined, or that market interest rates have increased. Investors will then demand a higher yield for the same bond to compensate for the risk or opportunity cost involved.

As bond prices fall, the fixed interest payments (coupon payments) lead to a higher yield for new buyers. This means that if you pay less for the bond but still receive the same interest amount, your yield is effectively higher. Thus, the yield increases when prices decrease, reflecting the market adjustment to maintain equilibrium between the price of the bond and the income it generates for investors.

This fundamental principle of finance illustrates how yields adjust to changes in prices, reinforcing the notion that investors look for the best return on their investments.