Bond prices, yields & duration
See why fixed payments can change in market value and how maturity, duration, inflation, and credit risk interact.
- ↗Existing fixed-rate bond prices generally fall when comparable market yields rise.
- ↗Duration estimates interest-rate sensitivity; it is not an exact prediction.
- ↗Yield to maturity depends on assumptions and is not a guaranteed realized return.
The price–yield relationship
A conventional fixed-rate bond promises specified payments if the issuer meets its obligations. When new bonds offer higher yields, an older bond's fixed payments may be less attractive, so its market price generally falls. When comparable yields fall, the older bond's payments may be more attractive, so its price generally rises. Credit spreads, liquidity, embedded options, and changing expectations also affect price.
Maturity is the scheduled repayment date, not a promise that you can sell at par beforehand. Yield to maturity is a calculation based on price, promised cash flows, and holding-to-maturity assumptions; actual return can differ due to default, calls, reinvestment rates, taxes, transaction costs, or early sale.
Duration as a sensitivity tool
Macaulay duration is a weighted-average timing measure of bond cash flows; modified duration estimates the approximate percentage price change for a one-percentage-point move in yield, assuming other factors stay broadly constant. A bond with duration of about 5 years might lose roughly 5% for a 1-percentage-point yield rise as a first-order estimate; convexity and other changes mean the actual move can differ. Do not treat duration as a maturity date or precise forecast.
Longer-duration bonds are usually more sensitive to rate changes. Credit quality adds another axis: a Treasury and a lower-quality corporate bond can have different default, liquidity, and spread risks even at similar durations. Inflation-linked Treasury securities adjust principal using an inflation measure under their terms, but market prices, real yields, taxes, and holding period still matter.
Yield is not a safety rating
A high quoted yield can reflect default risk, long duration, illiquidity, a falling market price, or a distribution that is not sustainable. Compare yield definitions, maturity, credit quality, call risk, tax treatment, and fund holdings. Bond funds fluctuate; unlike an individual bond held to maturity, a typical open-ended bond fund does not promise a fixed date when investors receive a stated principal amount.
All else equal, what often happens to a fixed-rate bond's price when market yields rise?
Keep learning from primary sources
For details that change, check the current original document and official guidance. This course is education, not personalized investment, tax, or legal advice.
U.S. examples are used in several lessons. Investors elsewhere should check local laws, regulators, tax authorities, and account terms.