[MRM]

The bond has a face value that gets paid to the owner at maturity. So when a new ten year bond is purchased, you pay less than face value for it. The diference between what you paid and the face value at maturity is the interest you earn.

So when the bond gets bought and sold in the secondary market (the bond market, Wall Street, whatever you want to call it) the value of the bond depends on the interest rate people are willing to pay to get the face value of the bond when it matures.

When you pay less than face value you make more in interest. So the price of the bond goes down, but the face value stays the same - the effective interest rate is higher. When you pay closer to face value, you earn less interest - the interest rate is lower.

Basically the more you pay for the bond, the less interest there is to earn, so the interest rate goes down. When bonds cost less to get the face value at a later date, you get a higher return - a higher interest rate.

Clear as mud?