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When market interest rates rise, prices of existing fixed-rate bonds generally fall. Their coupon payments stay fixed, so buyers typically will pay less for an older, lower-coupon bond when new bonds offer higher yields. That lower purchase price raises the bond’s yield to maturity for a new buyer.
Why bond prices usually fall when rates rise
A fixed-rate bond promises scheduled interest payments, called coupons, based on its face value. Those payments do not automatically increase when market yields rise. If newly issued bonds offer higher rates, investors will generally demand a lower price for an older bond with smaller fixed payments. The reduced price helps bring the return available to a new buyer in line with prevailing yields.
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The SEC Office of Investor Education and Advocacy states: “A fundamental principle of bond investing is that market interest rates and bond prices generally move in opposite directions.” SEC Investor Bulletin, June 26, 2013.
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How price, coupon and yield to maturity differ
- Price is what a buyer pays for the bond in the market. It can be above or below face value.
- Coupon rate is the stated interest rate used to calculate the bond’s scheduled payments. For a fixed-rate bond, it does not change just because market rates move.
- Yield to maturity estimates the return for a buyer who pays the current price and holds the bond until maturity, taking account of the price and timing of promised payments. It assumes the promised payments are made.
For an existing fixed-rate bond, price and yield to maturity generally move in opposite directions: a lower market price means a higher yield to maturity for a new buyer, all else equal. The coupon itself has not risen.
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The SEC’s $1,000 bond example
In an illustrative example published June 26, 2013, the SEC describes a Treasury bond with a $1,000 face value, a 3% coupon and an original 10-year maturity. After one year, market rates rise from 3% to 4%. With nine years remaining, the example puts the bond’s price at $925 and its yield to maturity at 4%, up from 3%. The coupon remains 3%. This is a worked example under stated assumptions, not a prediction for every bond or a current market quote. SEC Investor Bulletin.
What makes one bond more rate-sensitive than another
The inverse relationship describes a general tendency, not a uniform price change. Comparing otherwise similar bonds, three features help explain why their prices may respond differently:
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- Time to maturity: Longer-maturity bonds generally have greater interest-rate risk than shorter-maturity bonds because more of their cash flows arrive farther in the future. SEC Investor Bulletin; Investor.gov: Bonds.
- Coupon: A lower-coupon bond generally is more sensitive to rising rates than a higher-coupon bond with otherwise similar terms. In its comparison of similar 2% and 4% coupon bonds, the SEC says the 2% bond falls by a greater percentage when rates rise. SEC Investor Bulletin; Investor.gov: Bonds.
- Credit quality and issuer: The SEC’s coupon-sensitivity comparison holds credit quality constant. In real markets, a bond’s price also reflects whether its issuer can meet its obligations; credit or default risk is distinct from interest-rate risk. SEC Investor Bulletin; Investor.gov: Bonds.
What happens if you sell before maturity or keep holding?
Selling before maturity
If rates have risen, selling a fixed-rate bond before maturity may mean accepting less than its face value or less than you paid. The actual sale price depends on the bond and market conditions; commissions or a broker’s markdown may also reduce proceeds. Investor.gov: Buying and Selling Bonds.
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An investor who holds a bond to maturity generally receives its face value and scheduled interest, subject to the issuer’s ability to pay and the bond’s terms. A market-price decline still matters if the investor needs to sell early or tracks the portfolio at current market value. SEC Investor Bulletin; Investor.gov: Bonds.
Government-backed bonds
For the U.S. government-backed bond discussed by the SEC, the guarantee covers timely interest and principal payment at maturity; it does not guarantee that the bond can be sold at par or at its original purchase price beforehand. SEC Investor Bulletin.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Other forces can move a bond’s price
Interest rates are not the only influence on an individual bond. Credit/default, inflation, liquidity and call risks can affect its value, and prices can also fall when sellers outnumber buyers. A callable bond may be repaid early under its terms, limiting how long an investor can keep receiving its coupon. A rate change alone does not determine an exact price move. Investor.gov: Bonds; SEC Investor Bulletin: High-Yield Bonds.
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