If the market interest rates go up, the price of a bond (representing a loan) falls. This is because the bond pays a fixed interest and the person now buying it from the market expects a higher return. That person is now willing to pay less for the fixed interest bond – effectively increasing the return. This effective return is called yield. Thus interest rates and bond prices move in opposite directions. Since the NAV of say, a debt mutual fund, is determined by the price of bonds that the fund holds, rising interest rates mean lower bond prices and lower NAV. Lower interest/yields mean higher bond prices and higher NAV.
Relationship between Yield and Bond price
