Quick answer: existing fixed-rate bond prices generally fall when comparable market yields rise because their promised payments become less attractive. The bond’s coupon usually does not change; its market price adjusts. Duration estimates sensitivity, while credit quality, inflation and the need to sell early add separate risks.
Reviewed October 3, 2026. Educational guide; all numerical scenarios are hypothetical and exclude costs and taxes. Featured image: AI-generated conceptual illustration.
Why do bond prices fall when interest rates rise?
Imagine two promises with comparable risk and payment dates. One was issued earlier; the other is newly available. If the new promise pays more, buyers will not normally pay the same amount for the lower-paying old one. A lower purchase price can bring the older bond’s return closer to the market requirement.
Investor.gov’s bond guide explains this interest-rate risk and distinguishes it from default, liquidity, inflation and call risks. A fixed payment does not mean a fixed resale value.
A one-year bond calculation without complicated math
Assume a hypothetical bond has exactly one remaining payment: $1,040 one year from now, comprising $1,000 principal and $40 interest. There are no earlier payments, no default or call risk and no transaction expenses. The required one-year yield determines today’s price.
Price = final payment ÷ (1 + required yield).
| Required annual yield | Calculation | Price today |
|---|---|---|
| 3% | $1,040 ÷ 1.03 | $1,009.71 |
| 4% | $1,040 ÷ 1.04 | $1,000.00 |
| 5% | $1,040 ÷ 1.05 | $990.48 |
The contractual $1,040 payment stays unchanged in every scenario. What changes is the amount a buyer pays to receive it. At a 5% required yield, $990.48 invested for one year grows to approximately $1,040. The price decrease is not evidence that the issuer cut the coupon.
Real bonds may have semiannual payments, accrued interest and different quoting conventions. This is a deliberately simplified present-value example, not the price of a security available for purchase.
Coupon, yield and total return are different
A coupon describes promised interest relative to face value. Current yield divides the annual coupon payment by the market price, but ignores capital gains or losses to maturity. Yield to maturity incorporates scheduled payments and the price paid under specified assumptions; it is not a guarantee.
FINRA’s yield and return guide explains these distinctions. For your own comparison, ask which yield a quote displays, what date it assumes and whether fees are included. A large coupon is not automatically a large total return.
Duration: the shortcut that has limits
FINRA describes duration as a measure of rate sensitivity. For a small yield change, a common approximation is percentage price change ≈ negative modified duration × change in yield, with yield change expressed as a decimal.
Hypothetical estimate: modified duration of 6 and a yield increase of 0.50 percentage points imply roughly −6 × 0.005 = −3%. This is an approximation, not an exact forecast. Larger changes, changing credit spreads, embedded options and curvature of the price-yield relationship can make the actual result different.
Duration is not simply the number of years until maturity. A portfolio with regular coupon payments differs from one with a single final payment. Use the specific duration measure disclosed for the investment rather than substituting maturity.
What changes if you hold a bond to maturity?
For a noncallable bond whose issuer makes every promised payment, holding to maturity avoids the need to accept an interim resale price. It does not eliminate inflation, opportunity costs or issuer default. A bond bought above face value also does not repay that premium as principal.
Likewise, a conventional bond fund is not the same as one individual bond with one repayment date. Review its holdings, duration and prospectus. Do not assume waiting until a particular calendar date restores the amount originally invested.
A checklist before reacting to a bond loss
- Is the loss a market-price change, missed payment or both?
- Did comparable yields rise, credit risk worsen, or both?
- What are the maturity, duration and call provisions?
- Will you need to sell before the scheduled repayment?
- What do price, interest received, fees and taxes imply for total return?
For market context, see our long-term Treasury yield analysis. For purchasing-power context, use the real return guide. Rate risk and inflation risk answer different questions.
Frequently asked questions
Does a Fed rate cut guarantee every bond rises?
No. Relevant market yields, expectations and credit conditions can move differently from the policy rate.
Can I lose money on a government bond?
A bond can trade below the price you paid before maturity, and inflation can reduce the purchasing power of its payments. Credit and currency risks depend on the issuer and instrument.
Are higher yields always better?
No. Compare risk, maturity, costs and the purpose of the investment, not just a headline yield.
Bottom line: a fixed-rate bond is a stream of promised payments whose resale value can change. Start with those payments and the market yield, then evaluate duration and the risks beyond rates. This is education, not a recommendation to buy or sell a bond.