BOND MATH: The Theory Behind the Formulas

Changes in Bond Prices and Yields

Bond prices change from day to day because of the passage of time. We see this in Figure 2.2, where the zero-coupon corporate bond price rises smoothly over time from 60 to 100. The other reason why bond prices change is that, in reality, the yield never is constant. Think of the yield as the investor's required rate of return for holding the bond to its maturity and bearing the default risk. If for some reason investors require a higher (or lower) return for the bond, the price must fall (or rise).

It is useful for analysis to break a corporate bond yield into a benchmark and a spread over (or, perhaps, under) that benchmark. Then changes in the corporate yield are due to changes in the benchmark, changes in ...