The secondary market prices at which investors purchase and sell bonds fluctuate in the opposite direction of the expected yields. Once a bond is issued, its owner receives set interest payments for the duration of the bond’s term, which does not vary. However, interest rates in financial markets fluctuate often, and as a result, new bonds will pay different interest to investors than old bonds.
For example, suppose interest rates fall. New bonds that are issued will now offer lower interest payments. This makes existing bonds that were issued before the fall in interest rates more valuable to investors, because they offer higher interest payments compared to new bonds. As a result, the price of existing bonds will increase. However, if a bond’s price increases it is now more expensive for a potential new investor to buy. The bond’s yield will then fall because the return an investor expects from purchasing this bond is now lower.
