Interest Rates · U.S. search trend · Updated 2026-06-13
How Interest Rates Affect Bond Prices
Fixed-rate bond prices generally move in the opposite direction from market interest rates. Duration, maturity, coupon, and credit risk determine how large the move can be.
Key takeaways
Why prices and yields move in opposite directions
Suppose an existing bond pays a fixed coupon while newly issued bonds offer a higher yield. Investors will normally pay less for the older bond until its effective yield becomes competitive. When market yields fall, the older higher-coupon bond can become more valuable.
Duration measures sensitivity
Duration estimates how sensitive a bond's price is to a change in yields. A duration of six suggests that a one-percentage-point rise in yields could produce an approximate six-percent price decline, before considering convexity and other factors.
- Longer maturity generally means higher duration
- Lower coupon generally means higher duration
- Larger yield changes make simple duration estimates less precise
- Credit-spread changes can move corporate bonds independently of Treasury rates
What happens when rates fall
Existing fixed-rate bond prices usually rise when comparable market yields decline. However, new cash flows may then be reinvested at lower rates. Bond investors should consider price risk, reinvestment risk, inflation risk, liquidity, and issuer credit quality together.
Frequently asked questions
Why do bond prices fall when interest rates rise?
New bonds offer higher yields, so existing lower-coupon bonds generally need a lower market price to remain competitive.
Which bonds are most sensitive to interest rates?
Long-maturity, low-coupon bonds usually have higher duration and greater sensitivity.
Do I lose money if I hold a bond to maturity?
Interim price changes may not determine the final principal payment, but default, inflation, call, liquidity, and reinvestment risks remain.