Bond price vs. yield, with one worked example

A bond promises fixed coupon payments and its face value at maturity. Its price is simply the present value of those promised payments, discounted at the yield the market currently demands.

When market yields rise above the coupon rate, the fixed payments are worth less in today’s money, so the price falls below face value — the bond trades at a discount. When yields fall below the coupon, the bond trades at a premium.

Duration measures how sensitive the price is to yield changes. Longer maturities and lower coupons mean higher duration, and bigger price swings when rates move.