Legally Insightful · Australian explainer
Quick answer: Existing fixed-rate bonds generally fall in market value when comparable market yields rise. Their coupon payments do not automatically increase, so buyers usually demand a lower purchase price to obtain a competitive return.
The coupon stays fixed while the market moves
Suppose a bond pays $400 a year on $10,000 face value. New bonds with similar risks and maturity might later offer higher yields. Investors have less reason to pay $10,000 for the older bond if other investments now offer greater income for the same outlay.
The older bond’s price can fall until its remaining payments, together with the final principal repayment, offer a competitive yield. The reverse is broadly true when market yields fall. This is the price–yield relationship, not a change to the original coupon contract.
Duration explains the size of the reaction
The longer an investor waits to receive the bond’s cash flows, the more sensitive the present value tends to be to changes in yield. Duration is a way of describing that sensitivity. Longer-duration bonds generally move more for the same yield change.
Duration is only an approximation, particularly for large yield movements or bonds with call options. Credit spreads can also move independently of government yields, so real-world bond prices do not respond to the cash rate alone.
What happens if you hold until maturity?
If the issuer makes every promised payment and you hold a conventional bond to maturity, you generally receive its contractual maturity amount regardless of the interim screen price. That does not erase the economic opportunity cost of holding a lower-yielding security.
Selling before maturity crystallises the market price at the time. A long-term investor and someone who needs the money next month therefore experience the same market move very differently. Credit defaults and special contract terms remain separate risks.
A practical example
Consider two bonds with the same issuer. One matures in six months; the other matures in 15 years. If required yields rise by one percentage point, the 15-year bond will typically experience a much larger price decline. Its distant cash flows are discounted over many more years.
Frequently asked questions
Do RBA rate increases always make every bond fall?
No. Markets price expectations ahead of announcements, and individual bonds also respond to credit spreads, inflation expectations and liquidity.
Does a lower bond price mean the coupon was cut?
Usually not for a fixed-rate bond. It means the market value of the existing promised payments has changed.
Further reading from official sources
Related Legally Insightful guides
- What Is a Bond? A Beginner’s Guide for Australians
- Coupon Rate vs Yield to Maturity: The Key Difference
- Bond ETFs vs Individual Bonds: What Changes?
Important: This article is general educational information about Australian law or financial concepts, not financial, legal or tax advice for your circumstances. Terms, product documents and rules can change. Confirm details with the relevant provider or authority and seek qualified advice where appropriate.
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