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When market yields rise, prices of existing fixed-rate bonds generally fall because their promised coupon payments have not changed. A buyer will usually pay less for those older, lower-paying cash flows to earn a return competitive with newly available bonds. The bond’s coupon rate stays fixed; its yield to maturity changes as its price changes.
Why do bond prices fall when yields rise?
A fixed-rate bond promises specified coupon payments and repayment of its face value at maturity, assuming the issuer makes those payments. If newly issued bonds offer higher yields, an older bond with lower fixed payments is less attractive at its old price. Its price generally has to fall so a new buyer can earn a competitive return from the remaining payments.
This is the arithmetic of valuing future cash flows at a higher required return—not a change to the old bond’s coupon. The SEC summarizes the relationship this way: “When market interest rates rise, prices of fixed-rate bonds fall.” (SEC Investor Bulletin, June 26, 2013; see also the SEC’s corporate-bond bulletin.)
How are coupon rate and yield to maturity different?
- Coupon rate: The stated interest rate used to calculate the bond’s coupon relative to its face value. For a fixed-rate bond, the coupon does not reset when market yields move.
- Yield to maturity (YTM): A measure used to compare bonds that accounts for the purchase price and promised cash flows through maturity, subject to its assumptions. Because price changes, YTM can change even when the coupon does not.
For otherwise comparable bonds, buying below face value produces a higher yield than buying at face value; paying above face value lowers the yield. Coupon and yield therefore are related, but they are not interchangeable.
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What does a price change look like?
In a simplified example from the SEC, a Treasury bond has a 3% coupon and a $1,000 face value. After one year, with nine years remaining, market rates rise from 3% to 4%. The illustrated price falls from $1,000 to $925, while YTM rises from 3% to 4%; the coupon remains 3%.
This is an illustration, not a rule that every bond loses exactly 7.5% when rates rise by one percentage point. Price sensitivity varies with the bond’s characteristics and other factors. The SEC’s example also shows the inverse direction: when market rates fall from 3% to 2%, the illustrated bond price rises from $1,000 to $1,082, and YTM is 2%. (SEC Investor Bulletin.)
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Which bonds are more sensitive to rising yields?
When comparing bonds, consider maturity and coupon while keeping credit quality and other terms as similar as possible. These are general relationships, not precise forecasts of a particular bond’s price.
- Maturity: Longer-maturity bonds generally have greater interest-rate risk because more cash flows arrive further in the future and have more time to be affected by changing rates.
- Coupon: All else equal, a lower-coupon bond generally is more sensitive to rate changes than a higher-coupon bond with a similar maturity and credit quality.
Creditworthiness, liquidity and other bond features also affect value, so a market-price move cannot always be attributed to interest rates alone. The SEC discusses these considerations in its interest-rate risk bulletin and corporate-bond bulletin.
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What if I hold the bond to maturity?
If you hold a bond to maturity and the issuer pays as promised, interim market-price changes do not by themselves change the coupon payments or face value due at maturity. But if you sell before maturity, the sale price may be above or below what you paid. For corporate bonds, payment remains subject to the issuer’s ability to pay; holding to maturity does not remove default risk.
Government backing does not guarantee a stable market price if you sell a Treasury or other government-backed bond before maturity. It concerns payment backing, not the price available in an early sale. (SEC Investor Bulletin; SEC corporate-bond bulletin.)
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.What should I check before selling early?
Look at both the quoted bond price and the transaction costs. The SEC notes that a sale may involve a commission or a broker markdown, and costs can vary by firm. Ask the broker how the transaction is priced, what markdown or commission applies, and compare costs before deciding. The SEC’s bond-sale guidance explains these possible charges. A quoted price and applicable costs are specific to the transaction; this general explanation is not individualized investment advice.
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