A bond keeps paying its stated interest, but its quoted market price falls. Those facts can coexist.

The payment promised by a conventional fixed-rate bond and the price another investor is willing to pay for it are different things. Changes in available market rates help explain why the price moves even when the coupon does not.

The explanation below concerns general fixed-rate bond mechanics. It is not a recommendation about buying, selling, or holding a particular security.

Separate coupon, price, and yield

The coupon is the interest rate applied to the bond's face value under its terms. The market price is what the bond can currently be bought or sold for. Yield relates the price paid to the cash flows an investor expects to receive.

TreasuryDirect explains pricing and interest for marketable Treasury securities, including the relationship between the set interest rate and face value. Those Treasury examples should not be extended automatically to every bond structure. [1]

Different yield measures answer different questions. A simple current yield is not the same calculation as yield to maturity, which also considers repayment at maturity and the timing of cash flows.

Work through a small example

Imagine a fictional fixed-rate bond with a $1,000 face value and $40 of annual coupon interest. At a $1,000 price, the simple current yield is $40 divided by $1,000, or 4 percent.

If its market price becomes $900 while the annual coupon remains $40, that calculation becomes approximately 4.44 percent. At a $1,100 price, it becomes approximately 3.64 percent.

These invented prices illustrate current-yield arithmetic only. They do not estimate an actual bond's price or promised total return. The calculation ignores accrued interest, transaction costs, taxes, default, and other features; it also omits the gain or loss associated with repayment at face value.

Understand the competition from new rates

If comparable newly available bonds offer more attractive interest for the risk and term, an existing lower-coupon bond generally needs a lower market price to compete. The reverse relationship can apply when comparable market yields fall.

FINRA describes this inverse relationship and uses duration to explain why some bonds are more sensitive to rate changes than others. [2]

"Comparable" matters. Changes in issuer credit, liquidity, call provisions, or other characteristics can affect price too. A move cannot always be explained by the Federal Reserve's latest announcement.

Duration is not the maturity date

Maturity describes when principal is due under the bond's terms. Duration is a measure of sensitivity to changes in interest rates.

A duration figure is useful for understanding rate exposure, but it is an estimate within a model, not a guarantee of a particular price move. FINRA's educational discussion explains the distinction and the general direction of the relationship. [2]

Before comparing durations, check which measure is reported and the assumptions involved. Do not treat two instruments as equally safe because they have a similar maturity or duration.

Holding and selling create different questions

Someone who must sell before maturity faces the market price available then. Someone intending to hold an individual bond to maturity still needs to assess whether promised payments will be made, along with other relevant risks and terms.

A bond fund is a portfolio with its own trading, expenses, distributions, and share-price behavior. It should not be treated as though the investor necessarily receives a single bond's face value on a fixed date.

A market headline about rising yields is therefore an invitation to identify the instrument and measurement. Ask which yield changed, over what period, and what happened to price. That is more informative than assuming the unchanged coupon means nothing happened.

Sources

[1] TreasuryDirect: Understanding Pricing and Interest Rates (https://www.treasurydirect.gov/marketable-securities/understanding-pricing/)

[2] FINRA: Interest Rate Changes and Duration (https://www.finra.org/investors/insights/bonds-interest-rate-changes-duration)