Price Yield Relationship – Concept

A basic property of a bond is that its price varies inversely with yield. The reason is simple. As the required yield increases, the present value of the cash flow decreases; hence the price decreases. On the contrary, when the present value of the cash flow decreases, the present value of the cash flow increases; hence the price increases. The graph of the price-yield relationship for any callable bond has a convex shape as shown in the diagram below:

price-yield-relationship

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