Quick answer
A fixed-rate bond's coupon never changes. When market rates rise, new bonds pay more, so buyers will only take the older, lower-paying bond at a lower price. When rates fall, the opposite happens and older bonds gain value [1].
Key points
- Market interest rates and fixed-rate bond prices generally move in opposite directions.
- The price adjusts until the old bond offers buyers about the same yield as a new one.
- Longer maturities and lower coupons mean bigger price swings for the same rate change.
- Duration is a rule-of-thumb estimate: roughly the percentage price change for a 1 percentage-point rate move.
- If you hold to maturity and the issuer pays, price swings along the way do not change the payments you receive.
#Why does a bond's price move at all?
A bond's payments are fixed when it is issued (see what a bond is). A $1,000 bond with a 3% coupon pays $30 a year until it matures, whatever happens to interest rates afterwards. But bonds can be sold to other investors before maturity, and the price on that market is not fixed. Investor.gov states the core rule: "When market interest rates rise, prices of fixed-rate bonds fall" [1]. FINRA describes the same relationship from the other side: when interest rates fall, bond prices generally rise [2].
The reason is competition. Nobody will pay full price for a bond paying $30 a year if a brand-new bond of the same quality pays $40 for the same $1,000. To find a buyer, the seller of the old bond has to accept a lower price. Investor.gov compares bond prices and rates to "opposing ends of a seesaw" [3].
How a rate rise lowers an existing bond's price
#How big is the price drop in a real example?
Investor.gov's bulletin on interest rate risk uses a bond with a 3% coupon bought for $1,000 when it yields 3%. One year later, market rates have risen to 4%, and the same bond — now with nine years left — is priced at about $925, which gives a new buyer a 4% yield to maturity [1]. We reproduced that figure in Python by discounting the remaining payments at the new rate.
Worked example
Worked example: repricing a 3% bond when rates hit 4%
A 10-year bond with a $1,000 face value and a 3% coupon paid twice a year ($15 every six months). One year after issue, 9 years (18 payments) remain. Market yields for similar bonds rise from 3% to 4%.
- Remaining payments
- 18 × $15, plus $1,000 at maturity
- Price at a 3% market yield
- $1,000.00
- Price at a 4% market yield (each payment discounted at 2% per half-year)
- $925.04
- Change for the seller
- −$74.96 (about −7.5%)
- Price if yields had fallen to 2% instead
- $1,081.99
A one-point rise in rates cut the bond's market price by about $75. A one-point fall would have raised it by about $82. The coupons themselves never changed.
Calculated in Python with price = sum of each payment ÷ (1 + yield/2)^period. Matches the about-$925 figure in Investor.gov's example. Hypothetical bond; ignores trading costs and taxes.
Why is the new price exactly what it is? At $925.04, a buyer who collects the remaining $15 coupons and the $1,000 at maturity earns about 4% a year on the money paid — the same as a new bond. That annual rate of return is the bond's yield to maturity, covered in bond yields explained.
Price of a new 10-year, 3% bond at different market yields
- Bond price
#Why do some bonds swing more than others?
Not every bond reacts the same way. Investor.gov notes that longer maturity means higher interest rate risk, and that bonds with lower coupon rates generally have higher interest rate risk than similar bonds with higher coupons [1]. A longer bond locks in its below-market coupon for more years, so the gap compounds. A low coupon means more of the bond's value sits in the single repayment at the end, which is the payment most sensitive to rates.
| Maturity | Price at 3% | Price at 4% | Change | Price at 2% | Change | Duration |
|---|---|---|---|---|---|---|
| 2 years | $1,000.00 | $980.96 | −1.90% | $1,019.51 | +1.95% | 1.93 |
| 10 years | $1,000.00 | $918.24 | −8.18% | $1,090.23 | +9.02% | 8.58 |
| 30 years | $1,000.00 | $826.20 | −17.38% | $1,224.78 | +22.48% | 19.69 |
The 30-year bond moved about nine times as much as the 2-year bond for the same rate change, and its duration (calculated in Python) is about ten times larger. The table also shows a small asymmetry: prices rise a little more when rates fall than they drop when rates rise by the same amount.
#What is duration, and how do you use it?
Duration squeezes all of this into one number. FINRA defines it as "a measure of the degree to which a bond investment is likely to change in value if interest rates were to rise or fall" [4]. The rule of thumb: for every 1 percentage-point change in rates, a bond's price moves in the opposite direction by roughly its duration in percent. FINRA's example is a bond with a duration of 10, which would be expected to fall about 10% if rates rose 1 percentage point and rise about 10% if they fell 1 point [4].
FINRA also gives the two drivers: "the higher the coupon rate, the lower the duration; the longer the maturity, the higher the duration" [4]. That matches the table above. A deeper definition is in our glossary entry on bond duration.
#Does any of this matter if you hold the bond to maturity?
Less than you might think. Investor.gov notes that if you intend to hold a bond to maturity, "the day-to-day fluctuations in the bond's price may not be as important to you" — you will still be paid the stated interest and the face value [1], provided the issuer does not default. The price matters when you sell early, and it matters through opportunity cost: while you hold a 3% bond, new bonds may be paying 4%.
Bond funds work differently. Investor.gov notes that when interest rates go up, the market value of the bonds a fund owns generally goes down, that funds holding longer maturities are more exposed, and that you can lose money in a bond fund — including one that holds only US government bonds [5]. Rate changes also affect other assets; see how interest rates affect stocks.
Common beginner mistakes
Assuming bonds cannot lose value
A Treasury bond can be free of default risk and still drop in price when rates rise. Default risk and interest rate risk are different things.
Reading a price drop as a lost payment
A lower market price does not change the coupons or the face value owed. It only matters if you sell, or if you compare against what new bonds pay.
Treating duration as a precise prediction
Duration is an approximation for small rate changes. It also says nothing about whether rates will rise or fall.
Mixing up percent and percentage points
A move from 3% to 4% is 1 percentage point (100 basis points), not 1 percent. Duration rules use percentage points.
What's the bottom line?
A bond's coupon is fixed, so its price does the adjusting. When rates rise, older bonds get cheaper until their yield matches new ones; when rates fall, they get more valuable. Longer maturities and lower coupons amplify the effect, and duration gives a quick estimate of how much. Next, learn how to read the numbers in bond yields explained.
Frequently asked questions
Do bond prices always fall when interest rates rise?
For fixed-rate bonds, prices generally move opposite to market rates. Other things also move prices — such as changes in the issuer's credit quality — so the relationship describes a tendency, not a law that holds every day.
Why do long-term bonds react more to rate changes?
They lock in their coupon for more years, and more of their value comes from the final repayment far in the future. Both make the price more sensitive, which shows up as a higher duration.
What is a 'discount' or 'premium' bond?
A bond trading below its face value is at a discount, usually because its coupon is lower than current market rates. One trading above face value is at a premium, usually because its coupon is higher.
Can I avoid interest rate risk completely?
Not completely. Shorter maturities reduce the price swings, and holding to maturity means the swings do not change the payments you receive, but you still face the risk that new bonds pay more than yours.
Sources
Grade A = primary source (regulator, government agency, official rulebook or the index provider's own documents). Numbers in brackets in the text point here.
- U.S. SEC — Investor.gov. Investor Bulletin: Fixed Income Investments — When Interest Rates Go Up, Prices of Fixed-Rate Bonds Fall (2026). Accessed 2026-10-03.A
- FINRA. Bonds (2026). Accessed 2026-10-03.A
- U.S. SEC — Investor.gov. What Are Corporate Bonds? (Investor Bulletin) (2026). Accessed 2026-10-03.A
- FINRA. Brush Up on Bonds: Interest Rate Changes and Duration (2026). Accessed 2026-10-03.A
- U.S. SEC — Investor.gov. Bond Funds and Income Funds (2026). Accessed 2026-10-03.A
This page is general education, not personal financial, tax or legal advice. Figures in worked examples are hypothetical and calculated before taxes and fees unless stated. Rules and limits change; check the linked primary sources for the current version. How we check every page.
