Q. As the price of a bond goes up, its yield goes:

[A] Down

[B] Up

[C] Remains same

[D] first up then becomes constant

Answer: A

Explanation: About the Yield Curve:

  • Bond yield is the return an investor realizes on a bond.
  • Price and yield are inversely related: As the price of a bond goes up, its yield goes down.
  • The yield curve is the graphical representation of yields from bonds (with an equal credit rating) over different time horizons. Under normal circumstances, the yield curve is upward sloping.
  • It means as one buys bonds of longer tenure — one gets higher yields. Moreover, a longer tenure also implies that there is a greater risk of failure.
  • Inverted Yield Curve: There are times when the bond yield curve becomes inverted e.g., bonds with a tenure of 2 years end up paying out higher yields (returns/ interest rate) than bonds with a 10-year tenure.
  • Such an inversion of the yield curve essentially suggests that investors expect future growth to be weak.

Source: EPIC August 2022