When market interest rates rise, the fixed coupon on an existing bond usually stays the same. New bonds may offer more, so buyers generally pay less for older bonds; because those same scheduled payments then cost less to buy, the older bond’s yield rises. Coupon rate, current yield, and yield to maturity (YTM) describe different things, so a quoted “bond yield” is useful only when you know which measure it is.
Why bond prices and market rates usually move in opposite directions
A fixed-rate bond promises specified interest payments based on its face value, along with repayment of that face value at maturity, subject to the issuer meeting its obligations. A rise in market rates does not normally change the coupon payment on an already-issued fixed-rate bond. Instead, the bond’s price adjusts as investors compare its existing payments with the higher rates available on comparable new bonds.
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If an older bond pays less interest than a comparable new issue, investors generally will not pay as much for it. A lower purchase price improves the return available from its fixed payments and principal repayment. That is why, for the same bond cash flows, price and yield move in opposite directions: paying less raises the buyer’s yield, while paying more lowers it. The SEC’s Office of Investor Education and Advocacy describes this as a fundamental principle: “A fundamental principle of bond investing is that market interest rates and bond prices generally move in opposite directions.”
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An SEC example of a price adjustment
The SEC illustrates the mechanics with a Treasury bond that has a 3% coupon, $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 remaining, the example shows a price of $925 and a yield of 4%. The figures demonstrate how a lower price can make the bond’s remaining cash flows competitive with a higher market rate; they do not mean a comparable bond must fall by $75 whenever rates rise by one percentage point.
Why bonds do not all react by the same amount
For otherwise comparable bonds, a longer time to maturity and a lower coupon generally mean greater sensitivity to interest-rate changes. A bond’s price reflects cash flows received over time, so a change in the rate used to value those cash flows can have a larger effect when more payments remain far into the future. This is a general comparison, not a guarantee that a longer-maturity bond will lose more in every market scenario.
What coupon rate, current yield, and YTM tell you
These figures answer separate questions. The coupon rate describes the bond’s stated interest relative to face value; current yield relates annual interest to the bond’s market price; YTM incorporates the price and the scheduled cash flows through maturity under stated assumptions.
| 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 buyer will earn at a price different from face value. |
| Current yield | Annual payable interest divided by the bond’s market price. | Whether the bond will repay at a premium or discount at maturity, or the total return through maturity. |
| Yield to maturity (YTM) | An annualized return measure that accounts for the purchase price, scheduled payments, and principal repayment at maturity. | A guaranteed realized return; it depends on assumptions about holding the bond and receiving and reinvesting cash flows. |
Coupon rate: the stated rate on face value
The coupon rate is applied to face value, not to the price a buyer happens to pay. For example, a fixed-rate bond with $1,000 face value and a 4% coupon has $40 in annual coupon interest if it makes one annual payment; the payment schedule may instead divide interest across multiple payments. Buying that bond above or below $1,000 does not normally change its contractual coupon amount.
Current yield: annual interest compared with today’s price
Current yield is calculated as annual payable interest divided by market price. Investor.gov’s bond glossary illustrates the calculation with a bond priced at $1,000 that pays $80 annually: its current yield is 8%. This is not YTM, because the calculation does not account for the difference between market price and principal repayment at maturity, or the timing of payments.
YTM: a fuller measure, but not a promise
YTM is widely used to compare bonds because it incorporates purchase price, scheduled interest payments, and repayment of principal at maturity. It is an annualized measure based on assumptions that the bond is held to maturity, required payments are made, and interim payments can be reinvested at the assumed rate. Selling early, missed payments, or different reinvestment conditions can make the realized return differ from the quoted YTM. A call feature can also change the expected cash-flow path, so check whether a yield quote assumes maturity or a possible earlier redemption.
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How a discount or premium changes the yield
When a bond trades below face value, it is at a discount; at face value, it is at par; above face value, it is at a premium. For an otherwise similar fixed-rate bond, a lower price generally corresponds to a higher YTM, while a higher price generally corresponds to a lower YTM. The SEC’s corporate-bond bulletin gives this illustrative comparison for otherwise similar 10-year bonds with $1,000 face value and a 4% coupon:
| Price in the SEC example | Position relative to face value | Example YTM |
|---|---|---|
| $1,000 | Par | 4.00% |
| $900 | Discount | 5.31% |
| $1,100 | Premium | 2.84% |
These are SEC example figures, not current prices or yields. A discount or premium alone does not establish a bond’s credit quality or overall risk; bonds may differ in issuer, liquidity, call terms, and other features.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.How to compare bond yield quotes
Before comparing two quoted yields, confirm that they refer to comparable bonds and to the same yield measure. A higher number is not automatically a better deal if it reflects greater credit risk, a different term, a call feature, or a different calculation.
- Price: Check whether each bond is trading at a discount, par, or a premium to face value.
- Coupon and payment schedule: Compare the stated coupon and how often interest is payable.
- Time to maturity: Compare remaining terms; longer maturity generally increases rate sensitivity when other features are comparable.
- Issuer and payment structure: Consider credit quality and default risk, and whether the bond has fixed or floating payments.
- Yield definition: Confirm whether the quote is current yield or YTM, and check how any call feature affects the cash flows assumed.
Investor.gov’s bond overview explains that bonds carry risks including interest-rate, credit, inflation, liquidity, and call risk. Yield is one part of a comparison, not a stand-alone measure of safety.
What happens if you sell before maturity—or hold on?
If rates rise and the market price of a bond falls, an investor who sells before maturity may realize a loss relative to the purchase price. Holding to maturity may avoid selling at that lower market price, provided the issuer makes the required payments and repays principal as promised. It does not remove default risk, and it has an opportunity cost: the investor remains committed to the bond’s cash flows instead of moving the money to investments with potentially higher rates.
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A U.S. government guarantee concerns timely interest payments and principal repayment at maturity; it does not guarantee that a bond sold before maturity will retain its purchase price. The SEC’s interest-rate risk bulletin explains this distinction. The effect on an individual bond also should not be confused with a promise that a bond fund, or all bonds, will recover to a buyer’s purchase price by a particular date.
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