Bonds, yields and duration
Bonds seem simple: lend money, get interest. The twist is that their prices move, in the opposite direction to interest rates.
How a bond works
A bond is a loan to a government or company. It pays a fixed coupon (interest) and returns the face value at maturity. Government securities carry essentially no default risk; corporate bonds pay more to compensate for credit risk, which ratings agencies grade from AAA downward.
Estimated price change ≈ −6 × 0.5 = -3%
Yield and price
The yield is the return you get if you buy at today's price and hold to maturity. When market interest rates rise, older bonds paying lower coupons become less attractive, so their prices fall until their yield matches. When rates fall, bond prices rise.
Duration
Duration measures how sensitive a bond's price is to rate changes. A rough rule: price change ≈ −duration × change in yield. A fund with duration 6 years loses about 6% if yields rise 1 percentage point, and gains about 6% if they fall 1 point.
Short-duration funds are steadier; long-duration and gilt funds swing more with RBI policy. Match duration to when you need the money.
Key takeaways
- 1Bond prices move opposite to interest rates.
- 2Duration ≈ % price change for a 1-point yield move.
- 3Match fund duration to your time horizon.
Try it with your own numbers
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Educational content, not investment advice. Figures are illustrative.