Editing Yield curve (section)

==Effect on bond prices==
{{further|Bond valuation}}
There is a time dimension to the analysis of bond values. A 10-year bond at purchase becomes a 9-year bond a year later, and the year after it becomes an 8-year bond, etc. Each year the bond moves incrementally closer to maturity, resulting in lower volatility and shorter duration and demanding a lower interest rate when the yield curve is rising. Since falling rates create increasing prices, the value of a bond initially will rise as the lower rates of the shorter maturity become its new market rate. Because a bond is always anchored by its final maturity, the price at some point must change direction and fall to par value at redemption.

A bond's market value at different times in its life can be calculated. When the yield curve is steep, the bond is predicted to have a large [[capital gain]] in the first years before falling in price later. When the yield curve is flat, the capital gain is predicted to be much less, and there is little variability in the bond's total returns over time.

As market rates of interest increase or decrease, the impact is rarely the same at each point along the yield curve, i.e. the curve rarely moves up or down in parallel. Because longer-term bonds have a larger duration, a rise in rates will cause a larger capital loss for them, than for short-term bonds. But almost always, the long maturity's rate will change much less, flattening the yield curve. The greater change in rates at the short end will offset to some extent the advantage provided by the shorter bond's lower duration.

Long duration bonds tend to be mean reverting, meaning that they readily gravitate to a long-run average. The middle of the curve (5–10 years) will see the greatest percentage gain in yields if there is anticipated inflation even if interest rates have not changed. The long-end does not move quite as much percentage-wise because of the mean reverting properties.

The yearly 'total return' from the bond is a) the sum of the coupon's yield plus b) the capital gain from the changing valuation as it slides down the yield curve and c) any capital gain or loss from changing interest rates at that point in the yield curve.<ref>{{Cite web|url=http://www.retailinvestor.org/bondPrice.html|title=Retail Investor .org : Bond Valuation Over Its Life|website=www.retailinvestor.org}}</ref>