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When market yields rise, the price of an existing fixed-rate bond generally falls; when yields fall, its price generally rises. The bond’s fixed coupon does not change. Instead, its market price adjusts so a buyer can earn a return competitive with comparable bonds available now.
Why do bond prices and yields move in opposite directions?
A fixed-rate bond promises scheduled cash flows: coupon payments and, if the issuer meets its obligations, repayment of face value at maturity. When market yields for comparable bonds rise, newly issued bonds can offer more competitive returns. Buyers are less willing to pay the old price for a bond with unchanged payments, so its price generally falls. Paying less for the same scheduled cash flows raises the yield implied by the purchase price.
The reverse applies when comparable market yields fall. An existing bond’s fixed payments become more attractive relative to new offerings, so buyers may pay more for it. A higher purchase price means a lower yield for the new buyer.
In valuation terms, a bond’s price reflects the present value of its expected cash flows, discounted at rates that account for timing and risk. With cash flows held constant, a higher required yield reduces that present value. The SEC’s Office of Investor Education and Advocacy summarizes the general relationship this way: “A fundamental principle of bond investing is that market interest rates and bond prices generally move in opposite directions.”
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Coupon, market price and yield to maturity are different
- Face value (or par): The principal amount due at maturity under the bond’s terms, subject to the issuer’s ability to pay.
- Coupon rate: The stated rate applied to face value to determine coupon interest. For a fixed-rate bond, the coupon payments do not change just because market yields move.
- Market price: The amount a buyer may pay or a seller may receive in the secondary market. It can be above or below face value.
- Yield to maturity (YTM): A measure of the return implied by the price paid and the bond’s scheduled cash flows through maturity. It is not the same as the coupon rate, and actual results depend on receiving the payments and holding the bond to maturity.
For a fixed-rate bond, the coupon describes the contractual interest payments; YTM reflects those payments and the price at which the bond is bought. That is why a bond’s coupon can stay unchanged while its market price and a new buyer’s YTM change.
What does the SEC’s example show?
The SEC’s June 26, 2013 Investor Bulletin illustrates the relationship with a 10-year Treasury bond. The bulletin’s figures are an illustration, not current Treasury quotes or a universal estimate of how much a bond will move.
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| SEC example scenario | Price and yield stated in the example |
|---|---|
| At the outset: 10-year bond with a 3% coupon and 3% yield | $1,000 price |
| After one year, with nine years remaining, example market rate rises to 4% | $925 price and 4% yield |
| After one year, with nine years remaining, example market rate falls to 2% | $1,082 price and 2% yield |
These are the SEC’s example inputs and outputs, not a statistical study, live market data or a rule that a one-percentage-point yield change always produces the same price move. Bonds differ in maturity, coupon, credit quality and other terms, so their price responses differ.
Why do some bonds react more than others?
Maturity
Among otherwise similar bonds, a longer-maturity bond generally has greater interest-rate risk than a shorter-maturity bond. More of its cash flows arrive further in the future, making their present value more sensitive to changes in the rate used to discount them.
Coupon
All else equal, a lower-coupon bond generally is more sensitive to rate changes than a higher-coupon bond. More of its value depends on payments arriving later rather than larger coupon payments received sooner.
Credit, liquidity and contract terms
The inverse relationship describes the effect of changing relevant market yields when other factors are held constant. A bond’s creditworthiness, liquidity, supply and demand, and embedded options can also affect its price. Credit or liquidity risks, in particular, can move a bond independently of benchmark interest rates. Floating-rate bonds have a different profile: their coupon payments periodically reset to a benchmark, rather than remaining fixed.
Does a price drop matter if you hold the bond to maturity?
A lower market price matters directly if you sell before maturity: you may receive less than face value, though the resale price can also be above face value. If you hold the bond to maturity, the scheduled interest and principal payments are not changed by an interim market-price move, but they remain subject to the issuer’s ability to pay. Holding also means accepting the bond’s fixed payments rather than switching to a newly available yield.
For U.S. government securities, a federal guarantee of timely interest and principal at maturity does not guarantee the price available if you sell early. A market loss before maturity and a failure to receive the contractual maturity payment are different risks.
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Current yield
Current yield is annual interest payable divided by the bond’s market price. Investor.gov illustrates it with a bond priced at $1,000 that pays $80 per year: its current yield is 8%. This ratio is narrower than YTM; by itself, it does not include all cash flows through maturity.
Yield curve
A yield curve is a line graph showing yields across different maturities. Investor.gov’s glossary describes a range from three months to 30 years. It is a snapshot of yields at different terms, not one rate that applies to every bond.
When comparing yield figures, check which measure is being reported and whether the bonds have comparable maturities, credit risks and terms. Current yield, YTM and a yield-curve point answer different questions and should not be treated as interchangeable.
Does every rate increase make every bond price fall?
No. The inverse relationship is a general rule for fixed-rate bonds when the relevant market yields change and other factors stay the same; it is not a guarantee that every bond’s price falls whenever a central bank changes a policy rate. Markets respond to expected as well as actual conditions, and a bond’s maturity, credit spread, liquidity, optionality and cash-flow structure affect its observed price. Floating-rate bonds may respond differently because their payments reset periodically.
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