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Random freezes, missing sound and display glitches usually trace back to one bad driver. Find and replace yours safely.Free scan · under a minuteWhen market interest rates rise, prices of existing fixed-rate bonds generally fall: their scheduled coupon payments stay the same, so buyers can pay less for them and earn a yield closer to what newly issued bonds offer. Coupon rate, current yield, and yield to maturity (YTM) describe different things, so check which measure you are reading before comparing bonds.
Why do bond prices fall when interest rates rise?
A fixed-rate bond promises specified interest payments based on its coupon rate and face value. If market rates rise, that promise usually does not change. A new bond with similar terms may offer a higher rate, making the older bond less attractive at its original price. Its market price generally has to fall to compete.
For the same scheduled cash flows, price and yield move in opposite directions. A buyer who pays less for the payments and principal due at maturity gets a higher yield than a buyer who pays more, assuming the payments arrive as scheduled and other relevant terms are the same.
The SEC’s 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.” The statement appears in its Investor Bulletin dated June 26, 2013.
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An SEC example of the inverse relationship
The SEC’s 2013 bulletin illustrates the mechanism with a Treasury bond carrying a 3% coupon, a $1,000 face value, and 10 years to maturity. In the example, it initially sells for $1,000 and has a 3% yield. One year later, with market rates at 4% and nine years left, the example gives a price of $925 and a 4% yield. These are teaching figures from the SEC, not current market quotes or a forecast that a bond will fall by that amount in one year.
What do coupon rate, current yield, and YTM mean?
Each measure answers a different question. The coupon rate describes the bond’s stated interest relative to face value; current yield relates annual interest to the market price; YTM estimates an annualized return based on the price and the bond’s scheduled cash flows through maturity.
| Measure | What it tells you | What it does not tell you by itself |
|---|---|---|
| Coupon rate | The stated interest rate applied to face value. For a fixed-rate bond, it determines the contractual coupon amount. | The return a new buyer earns at a price above or below face value. |
| Current yield | Annual payable interest divided by the bond’s current market price. | The gain or loss when principal is repaid, or the full return through maturity. |
| Yield to maturity (YTM) | An annualized return measure that accounts for purchase price, scheduled payments, and repayment of principal at maturity, under its assumptions. | A guaranteed realized return if the bond is sold early, payments fail, or actual cash flows and reinvestment conditions differ from assumptions. |
Coupon rate: the stated payment relative to face value
The coupon rate is applied to a bond’s face value, not its changing market price. A fixed-rate bond with a $1,000 face value and a 4% coupon, for example, has $40 in annual coupon interest if paid once per year; a different payment schedule can divide the annual amount into installments. A rise in market rates does not, by itself, raise that fixed coupon.
Current yield: annual interest relative to today’s price
Current yield is annual payable interest divided by market price. Investor.gov illustrates the calculation with a bond priced at $1,000 that pays $80 in annual interest: its current yield is 8% ($80 ÷ $1,000). That calculation does not account for whether the bond was bought above or below face value, or for principal repayment at maturity.
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YTM incorporates the purchase price, scheduled coupon payments, and principal repayment at maturity. It is widely used to compare bonds, but it is an estimate under assumptions—not a promise. The calculation presumes the bond is held to maturity and scheduled payments are made; actual return can differ if the bond is sold earlier, the issuer misses payments, or cash flows and reinvestment conditions differ.
How does a bond’s price change its yield?
A bond priced at face value is at par; below face value it is at a discount; above face value it is at a premium. For the same fixed cash flows, paying less generally raises YTM and paying more lowers it. An SEC corporate-bond example compares otherwise similar 10-year bonds with $1,000 face value and a 4% coupon:
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| Price | Position versus face value | SEC example YTM |
|---|---|---|
| $1,000 | Par | 4.00% |
| $900 | Discount | 5.31% |
| $1,100 | Premium | 2.84% |
These are figures from the SEC’s educational bond example, not live quotes. A price or yield alone does not establish a bond’s credit quality or overall risk.
Why are some bonds more rate-sensitive than others?
Interest-rate sensitivity depends partly on when cash flows arrive. All else equal, longer-maturity bonds and bonds with lower coupons tend to be more sensitive to interest-rate changes than shorter-maturity bonds and higher-coupon bonds. That is a general comparison, not a guarantee that a particular bond will lose more in every market scenario.
Market rates are only one influence on bond prices. The SEC identifies credit, interest-rate, inflation, liquidity, and call risks as factors investors should consider. A change in an issuer’s perceived ability to pay, difficulty trading a bond, changing inflation expectations, or the terms under which an issuer can call a bond may also affect its price or expected cash flows.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.What should you compare when reading bond yields?
Before comparing quoted yields, confirm that the bonds and measures are comparable. A useful checklist is:
- Price versus face value: Is the bond trading at a discount, at par, or at a premium?
- Coupon and payment schedule: What is the stated rate, and how often are payments made?
- Time to maturity: How long until principal is scheduled to be repaid?
- Yield measure: Is the quote current yield or YTM? They are not interchangeable.
- Credit and payment structure: What is the issuer’s credit risk, and are payments fixed or floating?
- Call terms: Can the issuer redeem the bond early, changing the expected cash-flow path?
What if you sell a bond before maturity?
If market conditions or other factors have reduced a bond’s price, selling before maturity can realize a loss relative to what you paid. Holding to maturity may avoid selling at a lower market price, but it does not remove default risk or the opportunity cost of holding a bond whose fixed payments are less attractive than current alternatives.
A U.S. government guarantee relates to timely interest payments and repayment of principal at maturity; it does not guarantee that a bond sold before maturity will retain its purchase price. The SEC explains this distinction in its Investor Bulletin.
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