Bond prices, yields and interest-rate risk
The payment can stay fixed while the price moves.
Separate coupon, price and yield. Use two invented bonds to see why the same yield change can affect different maturities differently.
Start with the promised payments
A bond sets out payments owed by an issuer. Face value is the principal scheduled for repayment; maturity tells you when it is due. A fixed coupon rate determines interest from face value, not from today's trading price. Our invented $1,000 bond has a 4% annual coupon, so it pays $40 each year. Its final payment is $1,040: the last coupon plus principal. The issuer's promise still depends on its ability to pay.
Price connects those payments to a yield
A higher required yield means a lower price for the same fixed payments. Think of compounding in reverse: a payment further away is divided by more years of growth to express its value today. At a 5% annual yield, our two-year example prices its $40 first payment and $1,040 final payment at about $981.41 in total. Nothing has changed its promised coupon. Only the price that reconciles the payments with the assumed yield has changed.
Read the yield label
Current yield divides annual coupon income by market price. For the two-year example at $981.41, $40 divided by that price is about 4.08%, not 5%. Yield to maturity also accounts for payment timing and the difference between purchase price and principal repayment. It is the discount rate that matches the scheduled payments to the price. A quoted yield is not a guarantee of your realized return: missed payments, an early sale, costs and the rates available to reinvest coupons can change the outcome.
Compare maturities at the same instant
Longer fixed-rate bonds generally react more to yield changes than otherwise similar shorter bonds. In the exercise, two years and ten years are the remaining terms at the same moment. Moving the assumed yield from 4% to 5% reduces the ten-year price by about 7.72%, versus 1.86% for the two-year bond. No year has passed between cases. These price changes exclude coupon income and are not holding-period returns or forecasts. Equal upward and downward yield changes also need not produce equal price changes.
A government bond can still move in price
Protection of scheduled payments does not fix the resale price. Even U.S. Treasury bonds can lose market value before maturity when yields rise. Actual Treasury bonds pay interest every six months; our annual-payment model deliberately uses a different convention. A higher coupon or a shorter maturity does not settle suitability on its own. Credit quality, early-redemption terms, liquidity, inflation and the currency of the payments also matter.
Connect the quote to the wider market
A yield curve compares yields across maturities. A policy-rate decision and a ten-year bond yield describe different horizons: expectations and compensation for uncertainty can move them differently. The exercise gives both bonds the same yield to isolate maturity; it does not reproduce a real yield curve. Use the market-cues lesson to connect an observed yield move with its date and competing explanations, without assuming it predicts the next stock-market move.
Keep the payments. Change the yield.
Two invented bonds each repay $1,000 at maturity and pay $40 at each year-end, including the final year. Compare two and ten years remaining, at the same instant just after a coupon date. The starting 4% yield prices both at $1,000. These are teaching assumptions, not market quotes.
| Time remaining | Model price | Change from $1,000 |
|---|---|---|
| 2 years | $1,000.00 | 0.00% |
| 10 years | $1,000.00 | 0.00% |
At a 4% yield, both bonds are at face value. The $40 annual coupon stays the same.
For the ten-year bond, current yield is $40 ÷ $1,000.00 = 4.00%. It differs from the assumed yield to maturity when the price differs from $1,000. Current yield leaves out the change between purchase price and principal repayment.
Follow the two-year calculation
Year 1: $40 ÷ (1 + 4%) = $38.46. Year 2: $1,040 ÷ (1 + 4%)² = $961.54. Add the discounted payments to get $1,000.00.
The assumed yield rises from 4% to 5% in our fixed-payment example. What changes?
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Primary reading on bonds
Sources checked 2026-10-15. Sources explain mechanics and risks. All exercise values are original hypothetical assumptions; human editorial review remains pending.
- Investor.gov · Interest-rate risk in fixed-rate bonds
Fixed payments, market-price changes and maturity-related interest-rate risk.
- Investor.gov · Corporate bonds
Issuer obligations, coupon types and default risk.
- FINRA · Understanding bond yield and return
Current yield, yield to maturity and why quoted yield differs from realized return.
- TreasuryDirect · Treasury bonds
Actual U.S. Treasury bonds pay every six months; the exercise assumes annual payments.
- RBA · Bonds and the yield curve
Prices, yields and the distinction between policy rates and different maturity horizons.