SIE Ready💵 Debt Securities · Lesson 2 of 7 · 6 min
The Price–Yield Seesaw
🎢 Rates go up, bond prices go down. Every time. Learn the seesaw and half the debt questions answer themselves.
💡 Key idea
Seesaw: rates up, prices down. Order the yields N → CY → YTM → YTC: they rise for a discount bond and fall for a premium bond.
🧠 Why it matters
NOMINAL YIELD is the coupon rate and never changes. CURRENT YIELD = annual interest ÷ current price: a 6% bond at $900 gives $60 ÷ $900 = 6.67%. YIELD TO MATURITY (YTM) adds the gain or loss to par at maturity; YIELD TO CALL (YTC) assumes the issuer redeems early. Price and yield move opposite: market rates rise, existing bond prices fall. Bonds below par are at a DISCOUNT, above par at a PREMIUM. Write the yields in order N, CY, YTM, YTC. For a DISCOUNT bond they climb (nominal lowest, YTC highest); for a PREMIUM bond they fall (YTC lowest). DURATION estimates price sensitivity: a duration of 7 means roughly a 7% price move per 1-point rate change.
📈 In the real world
📉 Mr. Brandt bought a 4% bond at par. Market rates rose to 5%, and his bond now trades at 92. A new buyer pays $920 for the same $40 a year (current yield 4.35%) plus an $80 gain at maturity; the price fell until the bond's YTM matched the new 5% market rate. Nothing about the issuer changed; only the market rate did.
📌 Takeaways
- Current yield = annual coupon in dollars ÷ market price
- Discount: N < CY < YTM < YTC. Premium: the exact reverse
- Longer maturity and lower coupon mean higher duration, so bigger price swings
📖 Terms in this lesson
Current yield: Annual interest divided by the bond's current market price.
Yield to maturity (YTM): The total annual return if a bond is held to maturity, counting coupons and the gain or loss back to par.
Yield to call (YTC): The annual return if a callable bond is redeemed on its call date at the call price.
Premium bond: A bond priced above par, usually because its coupon is higher than current market rates.
Discount bond: A bond priced below par, usually because its coupon is lower than current market rates.
Duration: A measure of how sensitive a bond's price is to interest-rate changes; the longer the duration, the bigger the price move.
Basis point: One hundredth of one percentage point (0.01%), the unit for quoting yield changes.
N-C-M-C ladder (premium vs discount yields): List Nominal, Current, Maturity, Call yields: a premium bond's yields fall along that order, a discount bond's rise along it.
✅ Test yourself
A bond with an 8% coupon trades at 80. What is its current yield?
- 8.0%
- 12.5%
- 6.4%
- 10.0%
Answer: D · 10.0%
$80 annual interest ÷ $800 price = 10%. 8% is the nominal yield, which ignores price, and 6.4% multiplies instead of dividing.
For a bond trading at a premium, which yield is the lowest?
- Current yield
- Yield to maturity
- Yield to call
- Nominal yield
Answer: C · Yield to call
A premium buyer loses the premium when the bond is redeemed; the sooner that happens (a call), the bigger the annual hit. So YTC is lowest and the nominal yield is highest.
If market interest rates fall, what generally happens to the prices of outstanding fixed-rate bonds?
- They rise
- They stay at par
- They move to the call price
- They fall
Answer: A · They rise
Older bonds paying higher coupons than new issues become more valuable, so their prices rise. Prices and yields move in opposite directions.
SIE-style questions, XP and streaks in the app. No sign-up needed.