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When market interest rates rise, the fixed coupon on an existing bond usually does not change. Its price therefore tends to fall so that a new buyer can earn a competitive return against newly issued bonds. To read the return correctly, distinguish the bond’s coupon rate from its current yield and yield to maturity (YTM): each answers a different question.
Why do bond prices fall when interest rates rise?
A fixed-rate bond promises scheduled interest payments based on its coupon rate and face value. If market rates rise after the bond is issued, those payments generally stay the same, while comparable new bonds may offer higher rates. Buyers will usually pay less for the older bond’s unchanged payments. The U.S. Securities and Exchange Commission (SEC) describes the principle this way: “A fundamental principle of bond investing is that market interest rates and bond prices generally move in opposite directions.” The statement is from the SEC’s Office of Investor Education and Advocacy, in its June 26, 2013 Investor Bulletin.
For the same scheduled cash flows, price and yield move in opposite directions: a lower purchase price raises the return available to a buyer, while a higher price lowers it. That is a general relationship, not a rule that every bond price change is caused only by interest rates.
An SEC example—not a current quote
In its 2013 teaching example, the SEC describes a Treasury bond with a 3% coupon, $1,000 face value, and 10 years to maturity selling for $1,000 with a 3% yield. One year later, the example assumes market rates are 4% and nine years remain; the bond is shown at $925 with a 4% yield. These are illustrative figures from the SEC bulletin, not current market prices or a forecast that rates will produce the same one-year price change for another bond.
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Coupon rate, current yield, and YTM: what each tells you
Yield figures are not interchangeable. Check which measure is being quoted before comparing bonds.
| Measure | What it tells you | What it does not capture by itself |
|---|---|---|
| Coupon rate | The stated interest rate applied to face value; for a fixed-rate bond, it determines the contractual coupon payment. | It does not tell you the return based on the price you pay. |
| Current yield | Annual payable interest divided by the bond’s market price. | It does not account for the difference between purchase price and principal repaid at maturity. |
| Yield to maturity (YTM) | An annualized return measure that accounts for purchase price, scheduled payments, and principal repayment at maturity, assuming the bond is held to maturity. | It is not a guarantee of the return you will realize if circumstances or cash flows differ from its assumptions. |
Coupon rate: the rate applied to face value
A bond’s coupon rate is set as a percentage of its face value. For example, a 4% coupon on a $1,000 face-value bond means $40 in annual interest, assuming annual payment for simplicity. The coupon payment is tied to the bond’s terms, not its changing market price. Actual payment frequency depends on the bond’s terms.
Current yield: annual interest relative to today’s price
Current yield is calculated as annual payable interest divided by current market price. Investor.gov’s glossary example uses a bond priced at $1,000 that pays $80 a year: its current yield is 8%. That figure does not include any gain or loss between the purchase price and the principal received at maturity.
YTM: a fuller measure with assumptions
YTM takes the purchase price, scheduled interest payments, and repayment of principal at maturity into account. It is commonly used to compare bonds with different prices, but it is an assumed annualized return rather than a promise. The actual result can differ if you sell before maturity, a payment is missed, or the cash flows or reinvestment conditions do not match the assumptions. A call feature can also change the expected cash-flow path.
How a discount or premium changes yield
When a bond’s market price is below face value, it is trading at a discount; above face value, it is at a premium; equal to face value, it is at par. For otherwise similar cash flows, paying a discount can raise YTM because the buyer pays less while still expecting the scheduled payments and principal at maturity. Paying a premium can lower it.
The SEC’s corporate-bond example compares otherwise similar 10-year bonds with $1,000 face value and a 4% coupon. The example gives these price and YTM pairs:
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| Price relative to $1,000 face value | Price | Example YTM |
|---|---|---|
| At par | $1,000 | 4.00% |
| Discount | $900 | 5.31% |
| Premium | $1,100 | 2.84% |
These are the SEC’s illustrative figures, not current market quotes. Price alone does not establish a bond’s credit quality or risk.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Which bonds are more sensitive to rate changes?
Interest-rate sensitivity varies. For otherwise comparable bonds, longer maturity and lower coupon generally mean greater sensitivity to interest-rate changes. This is a tendency, not a guarantee that a particular bond will lose more in every scenario. The SEC explains the relationship in its Investor Bulletin on interest-rate risk.
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Fix the driver behind crashes, sound loss and screen glitchesFind Drivers →Clear out junk files and repair common Windows errorsFree Scan →When comparing bonds, keep the comparison like for like and check:
- Price: Is it at a discount, par, or a premium to face value?
- Coupon and schedule: What rate applies, and how often are payments made?
- Time to maturity: How long until principal is due, and how does that affect rate sensitivity?
- Payment type and credit: Are payments fixed or floating, and what is the issuer’s default risk?
- Yield measure and call terms: Is the quoted figure current yield or YTM, and could a call alter the expected cash flows?
What a falling price means if you own the bond
If you sell a bond before maturity after its market price falls, you may realize a loss compared with what you paid. Holding it to maturity may avoid selling at that lower market price, but it does not remove the issuer’s default risk or the opportunity cost of being locked into payments below current market rates.
A U.S. government guarantee concerns timely interest payments and principal repayment at maturity; it does not guarantee that a bond sold early will retain its purchase price. The SEC outlines these and other risks—including credit, interest-rate, inflation, liquidity, and call risk—in its bond-investing bulletin.
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