Bond prices and interest rates move in opposite directions. This is the single most important mechanical fact about bonds, and it follows from one observation. A bond's payments are fixed, so the only thing that can adjust when the world changes is the price.
The core idea
When a bond is issued, its coupon is set and does not change. A ₹1,00,000 bond with an 8% coupon pays ₹8,000 a year for its whole life, whatever happens to interest rates afterwards.
Now say rates rise. New bonds of the same quality and maturity are issued paying 10%. Your 8% bond still pays ₹8,000, so why would anyone buy it from you at ₹1,00,000 when they can buy a new one and get ₹10,000? They would not. Your bond has to get cheaper. It falls to a price where the ₹8,000 coupon plus the gain from buying below face value adds up to a 10% return. Only then is it competitive.
The reverse works identically. If rates fall to 6%, your 8% bond is now generous, and buyers bid its price up until its return drops to 6%.
The bond did not change. The alternatives did, and the price moved to keep the bond in line with them.
Putting numbers on it
A ₹1,00,000 bond, 8% coupon paid semi-annually, exactly 4 years left. Value it at three different market yields:
| Market yield | Price | Change |
|---|---|---|
| 6% | ₹1,07,020 | +7.0% |
| 8% | ₹1,00,000 | at par |
| 10% | ₹93,537 | −6.5% |
A two-point move in yields moves this bond's price by roughly 7% either way. The bond price calculator lets you run this for any coupon and maturity.
Why longer bonds move much more
The 4-year bond above lost 6.5% when yields went from 8% to 10%. A 15-year version of the same bond would lose far more, closer to 15%.
The reason: with a long bond you are locked into the below-market coupon for much longer, and more of the bond's value sits in the distant principal repayment, which is the cashflow most affected by discounting. A short bond returns your money soon, and you reinvest at the new higher rate. A long bond makes you wait.
This sensitivity has a name, duration, roughly the percentage price change for a one-point change in yields. A bond with a duration of 4 moves about 4%. A duration of 12 moves about 12%. Duration rises with maturity and falls with a higher coupon.
The practical consequence: a long-dated bond is not simply a higher-yielding short-dated bond. It carries materially more price risk, and that risk is real every time you might need to sell before maturity.
Does this matter if you hold to maturity?
In cash terms, no. Hold to maturity and the issuer pays, and you receive every coupon and the full face value exactly as promised. A price dip along the way is a paper loss that reverses as the bond pulls back to par near maturity.
What you lose is opportunity. Your money is earning the old rate while new bonds pay more. That is a genuine cost. It is just not a realised loss unless you sell.
The paper loss becomes a real loss only if you have to sell early. An emergency, a better opportunity, a change of plan. Matching a bond's maturity to when you will actually need the money matters more than chasing the highest yield.
Credit is a separate mover
Everything above assumes the issuer's quality is unchanged and only market rates moved. A bond's price also moves when the market's view of the issuer changes. A downgrade, a bad results announcement, sector stress. That is credit risk, and it can push a price down even when interest rates are falling. When you see a bond's price drop, the question is always: is this rates, or is this the issuer?
Living with it
- Ladder your maturities. Spreading bonds across several maturity years means some money returns as cash each year to reinvest at whatever rates then prevail, instead of betting everything on one entry point. Building a bond ladder covers the mechanics.
- Match maturity to your horizon. If you need the money in three years, a three-year bond removes the price risk entirely. You get par back when you need it.
- Understand the duration you are holding. A portfolio with an average duration of 8 will swing about 8% for every one-point move in yields. If that would force you to sell at the wrong time, shorten it.
The takeaway
A bond's payments are fixed, so its price is what moves when rates change. Down when rates rise, up when they fall. Longer bonds move far more than shorter ones. Hold to maturity and the price swings do not cost you cash. Sell early and they do. Match your maturities to your needs and the whole problem mostly disappears.