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Fix the driver behind crashes, sound loss and screen glitchesFind Drivers →Repair Windows errors before they cause bigger problemsFix Now →Scan for outdated or missing drivers - takes under a minuteDriver Scan →When market yields rise, the price of an existing fixed-rate bond generally falls. Its coupon payments are fixed, so buyers will pay less for those payments when comparable new bonds offer higher returns. When yields fall, existing fixed payments look more attractive and the bond’s price generally rises. This inverse relationship assumes other factors—such as credit risk and liquidity—are unchanged.
Why bond prices and yields move in opposite directions
A fixed-rate bond promises specified cash flows: coupon payments and, if the issuer meets its obligations, repayment of face value at maturity. When comparable market yields rise, those old payments become less competitive. Buyers generally will only purchase the older bond at a lower price. Because the cash flows have not changed, paying less for them means a higher yield to maturity for the buyer.
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The same logic works in reverse. If market yields fall below an existing bond’s coupon rate, its payments become more attractive than those on comparable new bonds. Buyers may pay more than face value for it; that higher purchase price reduces the buyer’s yield to maturity.
The SEC summarizes the general rule: “A fundamental principle of bond investing is that market interest rates and bond prices generally move in opposite directions.” The word “generally” matters: benchmark rates are only one influence on a bond’s market price.
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Coupon, price and yield to maturity are different things
- 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 interest payments. A fixed coupon does not change just because market rates change.
- 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 as assumed.
For example, a bond with a fixed 3% coupon can continue paying that coupon while its price changes. If it sells below face value, a buyer’s YTM can be higher than 3%; if it sells above face value, the YTM can be lower. Conceptually, a bond’s price is the present value of its expected cash flows discounted at rates appropriate to those cash flows and the bond’s risks. A higher required yield means those future payments are worth less today.
SEC illustration: what a rate change can do
The SEC’s 2013 investor bulletin illustrates the relationship with a 10-year Treasury bond that starts at $1,000, with a 3% coupon and 3% yield. After one year, it has nine years remaining. In the bulletin’s example, if the market rate rises to 4%, the bond’s price falls to $925 and its yield is 4%. If the market rate falls to 2%, its price rises to $1,082 and its yield is 2%.
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These are illustrative figures published by the SEC, not current Treasury quotes or a standard response to every one-percentage-point rate move. Different bonds can respond by different amounts.
Which bonds are more sensitive to changing yields?
When comparing bonds with similar credit quality and other characteristics, two features commonly affect interest-rate sensitivity:
- Maturity: Longer-maturity bonds generally have greater sensitivity to changing yields than similar shorter-maturity bonds, because their cash flows extend further into the future.
- Coupon: All else equal, a lower-coupon bond generally is more sensitive to rate changes than a higher-coupon bond.
Those comparisons do not isolate every influence on price. Credit quality, liquidity, supply and demand, cash-flow timing, embedded options and the shape of yield changes can matter too. A price move should not automatically be attributed entirely to a change in benchmark interest rates.
What the inverse relationship means if you own a bond
A fall in market price does not, by itself, change the fixed coupon or the face value scheduled for repayment at maturity. If you hold a bond to maturity, you are focused on its promised payments and the issuer’s ability to make them. If you sell before maturity, the price available may be below—or above—face value, so you can realize a loss or gain.
For U.S. government securities, the federal guarantee of timely interest and principal applies at maturity; it does not guarantee the resale price if you sell early. Holding instead of selling also has an opportunity cost: your money remains tied to the bond rather than being reinvested at whatever yields are then available.
How to read common yield terms
Current yield
Current yield is annual interest payable divided by the bond’s market price. Investor.gov’s glossary example is a bond priced at $1,000 that pays $80 per year, giving a current yield of 8%. That ratio does not by itself account for all cash flows through maturity, so it should not be treated as interchangeable with YTM.
Yield curve
A yield curve is a line showing yields across different maturities. Investor.gov describes a range from three months to 30 years in its glossary. It is a snapshot across terms, not a single rate that applies to every bond.
When the rule needs qualification
The inverse relationship is a useful general rule for fixed-rate bonds when relevant market yields change and other factors remain constant. It does not mean every bond price falls whenever a central bank changes its policy rate. Market expectations, credit spreads, liquidity, optionality and the particular maturities exposed to a rate move all affect what happens to prices.
Floating-rate bonds are a notable distinction: their coupon payments periodically reset to a benchmark, unlike a comparable fixed-rate bond whose coupon stays the same. That can change their sensitivity to market-rate movements, though it does not eliminate other risks.
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