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1Repair Windows errors before they cause bigger problems2Scan for outdated or missing drivers - takes under a minute3Clear out junk files and repair common Windows errorsWhen market yields rise, the price of an existing fixed-rate bond generally falls; when yields fall, its price generally rises. The bond’s fixed coupon has not changed. Instead, buyers compare its scheduled payments with what comparable bonds now offer, and the market price adjusts so the bond’s yield is competitive.
Why bond prices and yields move in opposite directions
A fixed-rate bond promises specified coupon payments and, subject to the issuer’s ability to pay, repayment of face value at maturity. When comparable market yields rise, newly issued bonds can offer more attractive returns. Buyers are less willing to pay full price for an older bond with lower fixed payments, so its market price generally falls. At that lower purchase price, the old bond’s scheduled payments represent a higher yield to a new buyer.
If market yields fall, the same fixed payments become more attractive relative to new bonds. Buyers may pay more for the older bond, and that higher purchase price means a lower yield for the new buyer. The SEC summarizes the general relationship this way: “A fundamental principle of bond investing is that market interest rates and bond prices generally move in opposite directions.” Its statement appears in a June 26, 2013 investor bulletin; it is an explanation of the general relationship, not a forecast of current rates or prices (SEC Investor Bulletin).
In valuation terms, a bond’s price is the present value of its expected cash flows, discounted at rates appropriate to those cash flows and the bond’s risks. A higher required yield reduces the present value of unchanged future payments. The inverse relationship is therefore a general rule for fixed-rate bonds when relevant yields change and other factors are held constant—not a guarantee that every bond price moves the same way.
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Coupon rate, market price and yield to maturity are different
- Coupon rate: The stated rate applied to a bond’s face value to determine its interest payments. For a fixed-rate bond, the coupon payments do not change just because market rates move.
- Market price: The amount a buyer may pay or a seller may receive in the secondary market. It can be above or below face value.
- Yield to maturity (YTM): A measure of the return implied by the price paid and the bond’s scheduled cash flows through maturity. The SEC explains that the return depends on receiving the bond’s payments and being able to hold it to maturity (Investor.gov: What Are Corporate Bonds?).
Coupon and YTM are not interchangeable. A bond’s coupon is tied to its face value; its YTM reflects the price a buyer pays as well as the scheduled payments. So a fixed coupon can remain unchanged while the bond’s market price and a new buyer’s YTM change.
What the price change can look like
The SEC’s 2013 investor bulletin illustrates the relationship with a hypothetical 10-year U.S. Treasury bond starting at a $1,000 price, a 3% coupon and a 3% yield. After one year, with nine years remaining, the bulletin’s rising-rate example puts the market rate at 4%, the price at $925 and the yield at 4%. In its falling-rate example, the market rate becomes 2%, the price rises to $1,082 and the yield becomes 2% (SEC Investor Bulletin).
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These are the SEC’s illustrative figures, not current Treasury quotes or a universal estimate of how much a one-percentage-point rate move changes a bond’s price. Different bonds can respond differently because their cash flows, maturities, coupons and other risks differ.
Why some bonds are more sensitive to rate changes
Maturity
All else equal, a longer-maturity bond generally has more interest-rate risk than a similar shorter-maturity bond. More of its scheduled cash flows arrive further in the future, so changes in the rates used to value those payments can have a larger effect on today’s price. The SEC discusses maturity as a factor in a bond’s sensitivity to interest-rate changes (SEC Investor Bulletin).
Coupon
For otherwise similar bonds, a lower-coupon bond generally is more sensitive to rate changes than a higher-coupon bond. Its cash flows are weighted more toward principal repayment at maturity, making its value more exposed to changes in the rates used to discount future payments.
Credit, liquidity and contract terms
Benchmark interest rates are only part of a bond’s required return. A change in perceived credit quality, liquidity, supply and demand, or contract features can also affect its market price. The SEC’s rate-sensitivity comparison concerns bonds with similar credit quality and characteristics; it should not be used to attribute every observed price move solely to interest rates. Corporate bonds also carry credit/default and liquidity risks, which can independently affect their prices (Investor.gov: What Are Corporate Bonds?).
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Fixed-rate and floating-rate bonds
The inverse relationship is most directly applicable to fixed-rate bonds whose payments stay the same. Floating-rate bond payments periodically reset to a benchmark, so their coupons can adjust as rates change; they do not have the same rate sensitivity as otherwise comparable fixed-rate bonds. The SEC describes this distinction in its corporate-bond overview (Investor.gov: What Are Corporate Bonds?).
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.What a price drop means if you own the bond
A lower market price matters directly if you sell before maturity: the amount you receive may be less than face value. If you hold the bond to maturity, it is scheduled to pay its stated interest and face value, subject to the issuer’s ability to make those payments. Holding does not eliminate default risk or the opportunity cost of being locked into payments that may be less attractive than newer bonds.
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A U.S. government guarantee of timely interest and principal at maturity does not guarantee the price available if you sell earlier. The SEC makes this distinction in its investor bulletin on interest-rate risk (SEC Investor Bulletin).
How to read common yield terms
Current yield
Current yield is annual interest payable divided by the bond’s market price. It is narrower than YTM because it does not by itself account for all cash flows through maturity. Investor.gov’s example is a bond priced at $1,000 that pays $80 per year, giving it a current yield of 8% (Investor.gov: Current Yield).
Yield curve
A yield curve is a line graph showing yields across different maturities. Investor.gov describes it as a range that can run from three months to 30 years; it is a snapshot of yields across terms, not a single rate that applies to every bond (Investor.gov: Yield Curve).
When comparing a bond’s yield with another figure, check whether the number is current yield or YTM, what maturity it refers to, and whether the bonds have similar credit quality and terms. Those distinctions help prevent treating unlike measures or bonds as if they were equivalent.
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