Bonds, yields and the Fed
By SuperdayReps · Michigan Ross Undergrad | Wharton MBA · ex-Citi | ex-Greenhill · Former Head Mentor at a Leading IB Prep Service
9 min read · updated October 14, 2026
The yield curve lesson covers what a bond yield is and how yields line up across maturities. This lesson goes one level down: how a single bond is priced, why its price moves the opposite way to rates, the three different "yields" people quote, and what the Federal Reserve actually does when the news says it "raised rates."
A bond is a stream of fixed cash flows
A standard bond has three numbers fixed on the day it is issued:
- Face value (or par): the amount repaid at maturity, often $1,000.
- Coupon rate: the annual interest, as a percentage of face. A 5% coupon on $1,000 pays $50 a year.
- Maturity: when the face value comes back.
None of those change after issue. What changes is the price people will pay for the bond in the market, and that price is just the present value of the remaining coupons and the face value, discounted at today's market rate.
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Frequently asked
- Why do bond prices fall when interest rates rise?
- A bond's coupon is fixed when it is issued. If market rates rise, new bonds pay more, so nobody will pay full price for an old bond paying less. Its price falls until its yield matches the new market rate. Mechanically, the price is the present value of fixed cash flows, and a higher discount rate means a lower present value.
- What is the difference between coupon rate, current yield and yield to maturity?
- The coupon rate is the fixed annual interest divided by face value and never changes. Current yield is that annual coupon divided by today's price. Yield to maturity is the single discount rate that makes the present value of every remaining coupon and the principal equal today's price, so it also captures the gain or loss from price back to face value.
- What is duration?
- Duration measures how sensitive a bond's price is to a change in interest rates. A modified duration of 7 means the price moves roughly 7% for each 1 percentage point change in yield, in the opposite direction. Longer maturity and lower coupons mean higher duration.
- How does the Fed raise or lower interest rates?
- The Fed sets a target range for the federal funds rate, the overnight rate banks charge each other. Today it steers that rate mainly through the interest it pays banks on their reserves and the rate on its overnight reverse repo facility, which together set a floor under short-term rates. Open market operations, buying and selling Treasuries, were the main tool before 2008.
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