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1Clear out junk files and repair common Windows errors2Scan for outdated or missing drivers - takes under a minute3Repair Windows errors before they cause bigger problemsBond investors face two distinct risks: market prices can fall when interest rates rise, and issuers can fail to make promised payments. The first is interest-rate risk; the second is credit risk. They can occur together, but they affect your investment in different ways.
What are interest-rate risk and credit risk?
A bond is a debt security: a government, municipality, or company borrows money and promises interest payments and repayment of face value at maturity, subject to the bond’s terms and the issuer’s ability to pay. Those promises do not remove the possibility of either a price decline or a missed payment. The SEC’s Bonds FAQs explain the basic features and risks of bonds.
- Interest-rate risk is the risk that a bond’s market price will change when market rates change. For existing fixed-rate bonds, prices generally move in the opposite direction from rates.
- Credit risk is the risk that an issuer will not make interest or principal payments as promised or on time. A rating estimates relative risk; it is not a guarantee against default.
A bond can carry both risks. A bond from a creditworthy issuer can still lose market value when rates rise. A bond with greater default risk may offer a higher yield, but that higher yield does not make the extra risk disappear or ensure it will be offset by income.
Can I lose money on a bond if interest rates rise?
Yes, if you sell before maturity, you may receive less than you paid. When market rates rise, newly issued fixed-rate bonds may offer more attractive payments, so existing fixed-rate bonds generally have to sell at lower prices to compete. When rates fall, existing fixed-rate bond prices generally rise. The SEC describes this as a fundamental relationship in its 2013 Investor Bulletin on fixed-income investments.
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The SEC’s bulletin offers a hypothetical illustration, not a market statistic or forecast: a bond with $1,000 face value, a 3% coupon, and 10 years to maturity is shown at an illustrative price of $925 one year later after market rates rise from 3% to 4%, leaving nine years to maturity. The example shows how a one-percentage-point rate increase can reduce an existing bond’s market price; it does not predict the price change for any particular bond.
An interim price decline matters most if you need to sell before maturity. Holding an individual bond to maturity can make market-price fluctuations less relevant to the investor’s return, provided the issuer pays as promised. It does not protect against issuer default, and an early sale can produce a price above or below face value. Even a government-guaranteed bond can fall in price before maturity when rates change; a payment guarantee under the bond’s terms is not a guarantee of the price available in an early sale.
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What makes one bond more sensitive to interest rates?
For bonds of similar credit quality and otherwise similar features, longer maturities generally involve more interest-rate risk than shorter maturities. Lower coupons generally mean greater rate sensitivity, all else being equal. Duration is a measure that can help describe how sensitive a bond’s price may be to rate changes, but it is not a promise of a specific price move.
These are comparisons, not a way to calculate an exact outcome from maturity or coupon alone. The bond’s terms and other features also matter, and the available sources do not establish a duration or price-change estimate for any specific bond.
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Does a high bond rating mean it cannot default?
No. A credit rating is an assessment of relative credit risk, not a promise that payments will be made. The SEC’s Municipal Bonds page says ratings seek to estimate a bond’s relative credit risk compared with other bonds, while noting that even a high rating does not mean there is no chance of default. Ratings can also change.
To assess credit risk, consider the issuer’s ability to meet its obligations, its rating and any rating changes, and the bond’s terms. Corporate bond indentures may include covenants—for example, limits on taking on additional debt or requirements to maintain financial ratios. Such provisions are part of the bond’s terms, not a guarantee that the issuer will remain able to pay. The SEC’s overview of corporate bonds discusses credit risk and bond features.
High-yield corporate bonds generally carry greater default risk than investment-grade bonds. A higher coupon or yield may reflect that additional risk; it does not establish that the income will compensate for a loss.
How should I compare bonds?
Compare bonds with similar features where possible, and weigh the likely cash flows against the possibility of selling early or missing payments. A quoted yield alone does not describe either risk.
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Repair common Windows errors and clear accumulated junk for a smoother, more stable PC - no reinstall needed.Free scan · no reinstall| What to examine | Why it matters |
|---|---|
| Maturity and coupon | They help indicate relative sensitivity to rate changes. Longer maturities and lower coupons generally mean more rate sensitivity when other features are similar. |
| Credit quality and issuer | Consider the issuer’s ability to pay, current rating, changes to the rating, and relevant terms or covenants. |
| Price, coupon, and yield to maturity | Review the purchase price and expected cash flows together. A higher yield may reflect greater risk rather than a free increase in return. |
| Liquidity | Consider how readily the bond can be sold at a price that reflects its value, especially if you may need the money before maturity. |
| Product structure | An individual bond has a stated maturity. A bond fund holds a changing portfolio and exposes shareholders to fund-level interest-rate and credit risks. |
Are bond funds exposed to the same risks?
Yes. Bond funds can face both interest-rate risk and credit risk because they hold bonds. Unlike an individual bond, a fund holds a portfolio that changes over time; owning fund shares does not give you a single bond’s stated maturity date or repayment of face value on that date. The SEC’s guide to bond and income funds outlines these fund risks.
Before investing in a fund, review its current prospectus and shareholder report. Check the portfolio’s maturity or duration and its credit exposure so you can judge how the fund’s holdings align with your needs.
What should I keep in mind about taxes?
Tax treatment—particularly for municipal bonds—depends on the relevant jurisdiction and your personal circumstances. Do not assume a tax result applies to every investor; consult appropriate tax guidance for your situation.
Quick Recap
Sources
- SEC Investor.gov, Bonds – FAQs
- U.S. Securities and Exchange Commission, Office of Investor Education and Advocacy, Investor Bulletin: Fixed Income Investments — When Interest Rates Go Up, Prices of Fixed-Rate Bonds Fall (June 26, 2013)
- SEC Investor.gov, Municipal Bonds
- SEC Investor.gov, What Are Corporate Bonds?
- SEC Investor.gov, Bond Funds and Income Funds
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