The Mechanics of Bond Yields
Bonds are debt instruments. You loan a company or government money, and they pay you a fixed interest rate (the coupon). However, because bonds can be traded on the open market before they mature, their prices fluctuate based on broader interest rate environments. Understanding 'Current Yield' shows exactly what return you get if you buy the bond today.
Bond Market Dynamics
The Price/Yield Inverse Relationship
When global interest rates rise, newly issued bonds pay higher coupons. Therefore, older bonds with lower coupons become less attractive, forcing their market price to drop. Yield and Price always move inversely.
Trading at a Discount
When a bond trades below its Par Value ($1,000), it is trading at a discount. Because you pay less to receive the same fixed payout, your Yield goes up.
Trading at a Premium
When a bond trades above Par Value, you are paying extra to secure a high coupon. Your effective Current Yield is therefore lower than the printed coupon rate.