Bond prices and yields
Why a bond's price falls when interest rates rise, and what that does to a debt fund
Market figures as on 1 September 2026
Verified 12 October 2026
For training and education only. Not investment advice.
Trainer notes
Open by asking the room: if central government bonds carry no default risk, how can a gilt fund show a negative return in some months? Take two or three answers. This deck answers that question.
A bond is a loan that can be sold to someone else.
The borrower's promise never changes. What changes every day is the price a buyer will pay for that promise. That price depends on what new loans are paying today.
Trainer notes
Keep this slide up for a moment. Everything else in the deck follows from it: fixed promise, moving price.
Four words to know first
Face value
The amount the borrower repays at the end. For most bonds discussed here, think of ₹1,000 or ₹100 per bond.
Coupon
The interest the borrower pays on the face value, fixed on day one. A 7% coupon on ₹1,000 pays ₹70 a year.
Maturity
The date the face value is repaid. The time left until then is the bond's remaining life.
Market price
What a buyer pays for the bond today. It can be above or below face value, and it moves every day.
Take-away: The maturity date is fixed and the time left shrinks every day. Only the market price moves with the market.
Trainer notes
Check understanding with one question: which of these four moves with the market after the bond is issued? Only the market price.
The seesaw, with real arithmetic
THE SET-UP
A bond with ₹1,000 face value and a 7% coupon has exactly one year left.
In one year its holder receives ₹1,070 (₹1,000 + ₹70). That amount is fixed.
- New one-year bonds pay 7%: a buyer pays ₹1,070 ÷ 1.07 = ₹1,000.
- Rates rise and new one-year bonds pay 8%: a buyer will pay only ₹1,070 ÷ 1.08 = ₹990.74.
- Rates fall and new one-year bonds pay 6%: a buyer will pay ₹1,070 ÷ 1.06 = ₹1,009.43.
- In each case the buyer earns exactly the going rate. The price adjusts until the old bond is no better and no worse than a new one.
Result: Yields up, price down. Yields down, price up. Nothing about the borrower changed.
Illustration with assumed figures. Not a forecast.
Trainer notes
Do the division on a whiteboard or phone calculator with the room. The point to land: the price moves so that the buyer's return matches today's rate.
Three numbers that all get called 'yield'
A bond with ₹1,000 face value, a 7% coupon and five years left is bought today for ₹950.
| Term | What it measures | On this bond |
|---|---|---|
| Coupon rate | Annual interest ÷ face value. Fixed for the bond's life. | ₹70 ÷ ₹1,000 = 7.00% |
| Current yield | Annual interest ÷ the price paid. Ignores any gain or loss at maturity. | ₹70 ÷ ₹950 = 7.37% |
| Yield to maturity (YTM) | The yearly return if the bond is held to maturity, every payment arrives on time and each coupon is reinvested at the same rate. | About 8.26%: ₹70 a year plus the ₹50 gain at maturity |
Illustration with assumed figures. When a factsheet or a news report says 'yield', it usually means yield to maturity.
Trainer notes
YTM is what the market quotes. A debt fund's factsheet shows the portfolio YTM; it is not a promised return, because the portfolio and prices change.
The longer the bond, the bigger the swing
| 1 year left | 10 years left | |
|---|---|---|
| 5% | 1,019 | 1,154 |
| 6% | 1,009 | 1,074 |
| 7% | 1,000 | 1,000 |
| 8% | 991 | 933 |
| 9% | 982 | 872 |
Read the chart
- At a 7% market yield both bonds are worth ₹1,000.
- If yields move to 8%, the 1-year bond is worth ₹990.74 and the 10-year bond ₹932.90.
- If yields move to 6%, they are worth ₹1,009.43 and ₹1,073.60.
- The same change in yield moves the 10-year bond roughly seven to eight times as much.
Illustration: prices computed from the standard bond-price formula with annual coupons. Assumed figures, not market data.
Trainer notes
This is the idea behind 'duration', covered in the next deck. For now: longer maturity, larger price move for the same change in yield.
Where yields stand
Three numbers to know before any conversation about debt funds. They change; check the date.
- INDIA 10-YEAR G-SEC YIELD
- 6.96%Yield on the 6.94% GS 2036, the 10-year government bond, on 1 September 2026.
- RBI POLICY REPO RATE
- 5.50%Raised from 5.25% on 7 October 2026. The 10-year yield on 1 September was about 1.7 points above 5.25%.
- CPI INFLATION
- 4.82%Year-on-year for August 2026 (provisional). RBI's target is 4%, within a band of 2% to 6%.
Sources: RBI Current Rates (10-year yield and repo rate, 1 Sep 2026); RBI Monetary Policy Statement, 7 Oct 2026; MoSPI CPI press release for August 2026.
Trainer notes
Refresh these at each month-end, using market figures that are at least 30 days old. Do not comment on where yields will go next. Market figures are shown with a lag of at least 30 days, in line with SEBI's norms on price data used for education.
What moves bond yields
RBI's policy rate
The repo rate anchors short-term rates. Expected changes in it are often reflected in yields before they happen.
Inflation
Lenders want a return above inflation. When inflation is expected to rise, they ask for higher yields.
Government borrowing
When more bonds are being sold than buyers want at the current price, yields rise to draw buyers in.
Global yields and flows
Foreign investors compare Indian yields with yields abroad. Their buying and selling moves prices here.
Credit risk
For company bonds, doubts about repayment push the yield up over the government bond yield. That gap is the credit spread.
Trainer notes
Do not turn this into a forecast. We explain what drives yields; we do not predict where they will go.
What this does inside a debt fund
A debt fund values nearly all its bonds at market-based prices every day, so its NAV carries these moves.
When yields fall
- Prices of the bonds it holds rise, so NAV gets a lift on top of the interest earned.
- Funds holding longer-maturity bonds gain more.
- New money is invested at the lower yields.
When yields rise
- Prices of the bonds it holds fall, which can outweigh the interest earned for a while.
- Funds holding longer-maturity bonds fall more.
- New money and maturing bonds are invested at the higher yields.
Take-away: This is interest-rate risk. It is separate from credit risk, which is about whether the borrower repays.
Trainer notes
This is why a gilt fund, which holds mainly government securities, can still show a negative return over some periods. It is interest-rate risk, not credit risk. Prices come from valuation agencies appointed by AMFI.
Four things people get wrong
Misconception'Government bonds cannot lose money.'
What is trueCentral government rupee bonds carry no default risk, and face value is repaid at maturity. But the price before maturity moves with yields.
Misconception'A higher yield means a better bond.'
What is trueA higher yield is payment for something: a longer wait, a weaker borrower, or a bond that is hard to sell.
Misconception'The coupon is my return.'
What is trueOnly if you paid face value and hold to maturity. Your return depends on the price you paid.
Misconception'A debt fund is like a fixed deposit.'
What is trueA deposit's value does not change day to day. A debt fund's NAV does, and its returns are not assured.
Check yourself
Question 1: A bond has a 7% coupon. New bonds of the same maturity now pay 8%. Will the old bond trade above or below its face value, and why?
Answer: Below face value. Its fixed ₹70 is worth less to a buyer who can get ₹80 elsewhere, so the price falls until the buyer's return matches 8%.Question 2: Two bonds have the same coupon. One matures in 1 year, the other in 10. Yields rise by one percentage point. Which price falls more?
Answer: The 10-year bond. The longer the remaining life, the larger the price change for the same change in yield.Question 3: A client says: 'My gilt fund holds only government bonds, so how did it fall last month?' What is the explanation?
Answer: Central government bonds carry no default risk, but their market prices fall when yields rise. A gilt fund values its holdings at market-based prices every day, so its NAV fell. This is interest-rate risk.
Sources and disclaimer
Sources for the figures in this explainer
- 10-year government bond yield (6.94% GS 2036, 6.9570%) and repo rate of 5.25%, both on 1 Sep 2026: Reserve Bank of India, Current Rates, rbi.org.in (page archived 2 Sep 2026).
- Policy repo rate 5.50% from 7 Oct 2026: RBI Monetary Policy Statement, Press Release 2026-2027/1264.
- CPI inflation 4.82% for August 2026 (provisional, base 2024=100): MoSPI press release dated 14 Sep 2026.
- Inflation target of 4% with a band of 2% to 6%, 1 April 2026 to 31 March 2031: Government of India notification of March 2026.
- All bond prices in the worked examples and the chart are illustrations computed with assumed figures. They are not quotes for any actual bond.
This material is for training and investor education only. It is not investment, tax or legal advice and is not a recommendation to buy, sell or hold any security or scheme. Examples use assumed figures unless a source and date are shown. Mutual fund investments are subject to market risks; read all scheme related documents carefully. Trustner Asset Services Pvt. Ltd. is an AMFI-registered Mutual Fund Distributor (ARN-286886).