gen-briefly-explain-bond-pricing-and-yield-and-one-common-miscon-de72

Briefly explain bond pricing and yield and one common misconception about it.

# Bond Pricing and Yield **Bond Pricing:** A bond's price is the present value of its future cash flows (coupon payments + principal at maturity), discounted at the required rate of return. Bonds trade at: - **Par** (face value) when coupon rate = market rate - **Premium** (above par) when coupon rate > market rate - **Discount** (below par) when coupon rate < market rate **Yield:** The return an investor earns by holding the bond. The most common measure is **yield-to-maturity (YTM)**—the total return if held until maturity, accounting for current price, coupon payments, and time to maturity. **Key Relationship:** Bond prices and yields move inversely. When yields rise, prices fall, and vice versa. ## Common Misconception **"Rising interest rates mean I'll lose money on my bond."** While bond *prices* fall when rates rise, this doesn't necessarily mean a *loss* if you: - Hold the bond to maturity (you'll receive full face value) - Reinvest coupons at the new higher rates (potentially offsetting price declines) The real risk is **if you need to sell before maturity**—then you'd crystallize the price loss. For buy-and-hold investors focused on income, rate changes primarily affect the bond's market value on paper, not the actual cash flows received.