Bond investors face two distinct risks: interest-rate risk, which can reduce a bond’s market price when rates rise, and credit risk, which is the possibility that an issuer will not make promised payments. They can occur at the same time, but they affect investors in different ways.
What do bond interest-rate risk and credit risk mean?
A bond is a debt security: a government, municipality, or company borrows money and promises interest payments and repayment of the bond’s face value at maturity. Those payments depend on the bond’s terms and the issuer’s ability to pay. See the SEC’s Bonds – FAQs.
As an Amazon Associate I earn from qualifying purchases.
- Interest-rate risk is market-price risk. It is the risk that changes in market rates will make an existing bond worth less—or more—if it is sold before maturity.
- Credit risk is payment risk. It is the risk that the issuer will miss or fail to make interest or principal payments as promised.
A bond can be exposed to substantial rate changes even when its issuer is considered creditworthy. Conversely, a bond with greater credit risk may offer a higher yield, but that extra yield does not eliminate the chance of missed payments or guarantee that it will compensate for a loss.
Quick wins for a faster PC:
Clear out junk files and repair common Windows errorsFree Scan →Fix the driver behind crashes, sound loss and screen glitchesFind Drivers →Repair Windows errors before they cause bigger problemsFix Now →Can I lose money on a bond if interest rates rise?
Generally, yes, if you sell a fixed-rate bond before maturity. When market rates rise, newly issued bonds may offer more attractive interest payments, so an older fixed-rate bond’s price generally falls to remain competitive. When rates fall, the price of an existing fixed-rate bond generally rises. The SEC describes this as a general relationship, not a guarantee about every bond’s price.
#1 Best Overall
The size of a bond’s price response varies. Other features being similar, longer-maturity bonds tend to have greater interest-rate risk than shorter-maturity bonds, and lower-coupon bonds tend to be more rate-sensitive. Duration can help describe price sensitivity, but an estimate for a particular bond depends on its details.
The SEC’s 2013 bulletin offers an illustration, not a market statistic or forecast: a bond with a $1,000 face value, a 3% coupon, and 10 years to maturity is shown at an illustrative price of $925 one year later after market rates rise from 3% to 4%, with nine years remaining. Read the full SEC Investor Bulletin on fixed-income investments.
Rank #2
A government guarantee of payments under a bond’s terms does not prevent its market price from falling before maturity. An investor who sells early may receive more or less than face value, even for a government-guaranteed bond.
The Tool Desk
Outbyte PC Repair FREERepair Windows errors before they cause bigger problemsFix Now →Outbyte Driver Updater FREEFix the driver behind crashes, sound loss and screen glitchesFind Drivers →Does holding an individual bond to maturity remove the risk?
Holding an individual bond to maturity can make interim market-price changes less important if you do not need to sell and the issuer makes the promised payments. It does not remove credit risk: repayment of face value still depends on the issuer paying as promised. If you sell before maturity, the sale price may be above or below face value.
Does a high bond rating mean it cannot default?
No. Credit ratings estimate relative credit risk; they are not guarantees and do not mean a bond has no chance of defaulting. Ratings can change as an issuer’s financial condition changes. The SEC’s Municipal Bonds page explains that ratings compare relative risk rather than promise the absence of default.
For corporate bonds, the indenture—the contract setting out the bond’s terms—may include covenants, such as limits on additional borrowing or requirements to maintain financial ratios. These provisions are relevant to assessing the bond, but they do not make payment certain. The SEC’s overview, What Are Corporate Bonds?, discusses corporate bond terms and risks. High-yield corporate bonds generally have greater default risk than investment-grade bonds; a higher coupon or yield is not certain compensation for any resulting loss.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.How should I compare bonds or bond funds?
Compare like with like where possible, and consider the prospect of an early sale as well as the payments the issuer promises. A higher yield alone does not tell you whether a bond is a better fit.
Recommended Free Tools
- Rate sensitivity: Compare maturity and coupon; duration can help express how sensitive a bond’s price may be to rate changes.
- Credit quality: Consider the issuer’s ability to pay, its rating and any rating changes, and relevant bond terms or covenants.
- Cash flows and price: Review coupon, yield to maturity, purchase price, and whether you may need to sell before maturity.
- Liquidity: Consider how readily the bond can be sold at a price reflecting its value.
- Structure: An individual bond has a stated maturity. A bond fund holds a changing portfolio, so fund investors face interest-rate and credit risks at the fund level rather than a single bond’s maturity and payment terms.
For a bond fund, consult its current prospectus and shareholder report. Check the portfolio’s maturity or duration and credit exposure. The SEC’s Bond Funds and Income Funds page provides additional information about these funds and their risks.
Municipal-bond tax treatment depends on jurisdiction and personal circumstances, so these general risk distinctions do not establish an individual tax outcome.
Quick Recap
Product prices and availability are accurate as of the date/time indicated and are subject to change. Any price and availability information displayed on Amazon at the time of purchase will apply.
