<p>The total return is how much you get out of the investment, minus how much you put in[1]. If we're treating how much you get out to be constant, then putting less in means that your net profit is higher. If we aren't considering the outflows to be constant, then we should expect investments with higher inflows to have higher returns.</p>
<p>[1] Often, the return is given as a percentage of the original investment, and may be adjusted based on how long it took to get the return, but adjustments don't affect the basic idea.</p>

CC BY-SA 4.0
2022-10-18T00:05:32.970Z
2022-10-18T00:05:32.970Z
Acccumulation
<p>There is an inverse relationship between the price of a debt contract and the implied yield (or rate of return).</p>
<p>To keep things simple, assume the government issues debt with a contract length of one year. The government asks the markets (via an auction): What amount of money are you willing to lend us today if we pay you £100 in one year's time?</p>
<p>Say, the answer is £97. This is the <strong>price</strong> of the 1-year bond (the debt contract). The (net) <strong>yield</strong> (or rate of return) implied by the relationship between the price and the nominal repayment of £100 in a year is then defined as <span class="math-container">$\frac{100-97}{97}\times 100=3.093\%$</span>. If the price is lower, the yield will rise and vice versa, by definition. For longer maturities, or bonds that pay interest a similar, but slightly more complicated logic applies.</p>
<p>By the same logic, but argued from the right-hand side of the definition, the price of the bond falls, if the yield rises.</p>

CC BY-SA 4.0
2022-10-17T12:55:36.187Z
Thank you so so much, that finally makes sense!   Don't know why my *Economics for Idiots* could not have explained that!
TheHonRose
CC BY-SA 4.0
2022-10-17T12:30:19.423Z
2022-10-17T12:30:19.423Z
BrsG
<p>Please forgive a very basic question from a non-economist, just trying to understand the current chaos in the UK markets. I gather that <strong>return</strong> on gilts (Government bonds) is in <strong>inverse</strong> proportion to their <strong>price</strong>. This seems counter intuitive. I would expect a higher investment to yield a higher return, but obviously not. Countries rarely default on their borrowing, although it has happened, so why would a more expensive investment bring a lower return?</p>
<p>Sorry to be so basic!</p>
<p>I've read some basic economics texts, but they simply state this as a fact, not <strong>why</strong>.</p>

CC BY-SA 4.0
2022-10-17T21:28:43.543Z
If return on gilts or anything else was in inverse proportion to price, why would any but the most obtuse investors not be as rich as Croesus?
Robbie Goodwin
<government-debt><bonds>
Price v return on gilts
TheHonRose
# Price v return on gilts

(Asked by: username_0 on 2022-10-17)

Please forgive a very basic question from a non-economist, just trying to understand the current chaos in the UK markets. I gather that **return** on gilts (Government bonds) is in **inverse** proportion to their **price**. This seems counter intuitive. I would expect a higher investment to yield a higher return, but obviously not. Countries rarely default on their borrowing, although it has happened, so why would a more expensive investment bring a lower return?

Sorry to be so basic!

I've read some basic economics texts, but they simply state this as a fact, not **why**.

**Tags:** government-debt, bonds

> **Comments:**
> **username_1**: If return on gilts or anything else was in inverse proportion to price, why would any but the most obtuse investors not be as rich as Croesus?  

---

## 2 answers

### Answer by username_3 on 2022-10-17. Score: 4 | Accepted answer

There is an inverse relationship between the price of a debt contract and the implied yield (or rate of return).

To keep things simple, assume the government issues debt with a contract length of one year. The government asks the markets (via an auction): What amount of money are you willing to lend us today if we pay you £100 in one year's time?

Say, the answer is £97. This is the **price** of the 1-year bond (the debt contract). The (net) **yield** (or rate of return) implied by the relationship between the price and the nominal repayment of £100 in a year is then defined as $\frac{100-97}{97}\times 100=3.093\%$. If the price is lower, the yield will rise and vice versa, by definition. For longer maturities, or bonds that pay interest a similar, but slightly more complicated logic applies.

By the same logic, but argued from the right-hand side of the definition, the price of the bond falls, if the yield rises.

> **Comments:**
> **username_0**: Thank you so so much, that finally makes sense!   Don't know why my *Economics for Idiots* could not have explained that!  

---

### Answer by username_2 on 2022-10-18. Score: 0

The total return is how much you get out of the investment, minus how much you put in[1]. If we're treating how much you get out to be constant, then putting less in means that your net profit is higher. If we aren't considering the outflows to be constant, then we should expect investments with higher inflows to have higher returns.

[1] Often, the return is given as a percentage of the original investment, and may be adjusted based on how long it took to get the return, but adjustments don't affect the basic idea.


---

