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One free scan finds every outdated or missing driver and matches the right update for your exact hardware.Free scan · exact hardware matchWhen market interest rates rise, prices of existing fixed-rate bonds generally fall. Their coupon payments stay the same, so buyers will usually pay less for an older bond when newly issued bonds offer higher yields. At that lower price, the existing bond’s yield to maturity rises for a new buyer.
Why bond prices generally 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 rates move. If new bonds offer higher yields, investors generally will not pay as much for an older bond with a lower fixed coupon. Its price must fall to make its promised payments more competitive with the alternatives.
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.” (SEC Office of Investor Education and Advocacy, June 26, 2013.) The word “generally” matters: rates are one influence on prices, and the relationship does not predict the exact move for every bond.
What happens to yield when a bond’s price falls?
A bond’s coupon rate is the contractual interest payment as a percentage of face value. Yield to maturity is a measure of the return a buyer may receive if the bond is held to maturity, accounting for the purchase price and the timing of payments. They are not interchangeable: the coupon on an existing fixed-rate bond can stay unchanged while its price and yield to maturity change.
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When the price falls, a new buyer pays less for the same scheduled cash flows, so the yield to maturity generally rises, assuming the promised payments are made. In the SEC’s example below, the coupon stays at 3% while the yield to maturity rises to 4%.
SEC example: a $1,000 bond falls to $925
The SEC’s June 26, 2013 bulletin illustrates the relationship with a Treasury bond—not a universal forecast or a current market quote:
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- The bond has a $1,000 face value, a 3% coupon, and an original 10-year maturity.
- One year passes, leaving nine years until maturity.
- Market rates rise from 3% to 4%.
- In the example, the bond’s price falls to $925, and its yield to maturity rises from 3% to 4%.
The example shows how a lower price can bring an older bond’s return in line with higher market rates. It does not establish how far the price of another bond will fall.
What determines how much a bond’s price moves?
The inverse relationship gives the general direction, but sensitivity varies. Comparisons are most useful when other characteristics are alike.
- Time to maturity: Longer-maturity bonds generally have more interest-rate risk than otherwise similar shorter-maturity bonds because more of their cash flows arrive farther in the future.
- Coupon: All else equal, a lower-coupon bond is generally more sensitive to rising rates than a higher-coupon bond. The SEC compares otherwise similar 2% and 4% coupon bonds and shows the 2% bond falling by a greater percentage when rates rise.
- Credit quality and issuer: The SEC’s sensitivity comparison holds credit quality constant. In real markets, a bond’s price also reflects the issuer’s ability to pay; credit or default risk is separate from interest-rate risk.
- Liquidity and trading costs: A bond that is difficult to trade may not sell at a price reflecting its apparent value. A commission or broker markdown can also reduce sale proceeds.
These factors are reasons not to apply a single price-change estimate to every bond. The cited SEC material explains the general mechanism and its stated example; it is not a valuation of an individual security.
If you sell before maturity or hold the bond
Selling before maturity
If rates have risen, selling an existing fixed-rate bond before maturity may mean accepting less than par value or less than the purchase price. The actual result depends on the bond and the transaction, and commissions or broker markdowns can affect proceeds. For details on selling, see Investor.gov’s guidance on selling a bond before maturity.
Holding to maturity
If an investor holds a bond to maturity, the investor generally receives its face value and scheduled interest, subject to the bond’s terms and the issuer’s ability to pay. A price decline in the meantime still matters if the investor needs to sell early or tracks the portfolio at current market prices. Investor.gov explains what can happen when an investor sells before maturity.
Government-backed bonds
For a U.S. government-backed bond, the guarantee applies to timely payment of interest and principal at maturity; it is not a guarantee that an investor can sell at par or at the original purchase price earlier. The SEC explains this distinction in its interest-rate risk bulletin.
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Interest rates are not the only influence on a bond’s market price. Investor.gov identifies credit or default risk, inflation risk, liquidity risk, and call risk. Supply and demand matter too: a high-yield bond’s price can fall when sellers outnumber buyers. A callable bond may be repaid early under its terms, limiting how long an investor can continue receiving its coupon.
For background on corporate bonds and their risks, see Investor.gov’s corporate bond overview, its bond-investing FAQs, and the SEC’s high-yield bond bulletin. These educational resources describe risks and market mechanics; they are not a live pricing feed or a forecast of future rates.
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