Price and yield move opposite

Here is the fact that catches everybody. When interest rates go up, bonds lose money. Not bond funds badly run, not risky bonds — all of them, including government bonds with no credit risk whatsoever.

It follows from one sentence in chapter 1: the payments are fixed.

The arithmetic

You own a ₹1,000 bond paying 7%, one year from maturity. In a year it hands you ₹1,070 — the ₹70 coupon and the ₹1,000 face value.

Now the Reserve Bank raises rates and newly issued one-year bonds pay 9%.

You want to sell. A buyer compares: they can buy a new bond and earn 9%, or buy yours. They will only buy yours if it also earns them 9%. Your bond pays ₹1,070 whatever they pay for it, so the price has to fall until ₹1,070 represents a 9% return:

price × 1.09 = 1,070
price = 1,070 ÷ 1.09 = 981.65

Your ₹1,000 bond is worth about ₹981.65. You did not do anything wrong, the borrower is as good as ever, and you are down ₹18.35.

Run it the other way. If new bonds paid 5%, the price would be 1,070 ÷ 1.05 = ₹1,019, and you would be up.

Why it has to be this way

Because the coupon cannot adjust. The borrower promised ₹70 a year and that is what arrives.

In any market, when the terms of a contract are fixed and conditions change, the price is the only thing left that can move. A bond's price moves so that its return matches what the market currently demands. The fixedness that made the instrument predictable is exactly what forces the price to swing.

So the seesaw is not a quirk. It is the direct consequence of the promise being fixed, and it would be impossible for it to work any other way.

Yield is the word for both ends

Yield is the return a buyer gets at today's price. Price and yield are two ways of saying the same thing: quote one and you have specified the other.

• Price falls → yield rises.
• Price rises → yield falls.
• "Yields rose today" and "bond prices fell today" are the same sentence.

Chapter 5 separates the three different yields people quote, because they are not interchangeable and the differences matter.

What this means for you

Four consequences, in order of how often they surprise people.

A debt fund can lose money. Chapter 7 of the mutual funds subject said a debt fund is a portfolio of bonds whose value moves. This is why. When rates rise, the bonds in the portfolio are worth less, the NAV falls, and nothing has gone wrong — the fund is doing exactly what it holds.

Holding to maturity makes the swing irrelevant. If you hold your 7% bond for its final year, you receive ₹1,070 as promised. The ₹981.65 was what someone else would have paid you in the middle. A price you never transact at has not cost you anything.

So the question is whether you can hold. The loss becomes real when you have to sell — which is chapter 9 of the equity subject's point arriving in a different asset class. Matching the bond's maturity to when you need the money removes this risk almost entirely.

Longer bonds swing more. A 30-year bond's price moves far more for the same change in rates than a one-year bond's. That sensitivity has a name and a number, and chapter 6 is about it.

The one sentence to keep

You cannot lose money on a government bond you hold to maturity, and you can certainly lose money on one you sell early. Both halves are true at once, and the difference between them is entirely about your horizon rather than about the bond.

The point

A bond's payments are fixed, so when market rates change the price is the only thing that can adjust — upward when rates fall and downward when they rise. Yield and price are the same statement from two ends. Held to maturity the swing does not touch you; sold early it is the whole outcome.