First, the key terms.

Face value
A contractual principal amount under a bond’s terms.
Coupon
A specified interest payment.
Yield
A return measure whose definition and assumptions must be identified.

The idea, explained

For a fixed-rate bond, higher market yields generally imply a lower price when other factors are unchanged. Existing fixed payments must compete with newly available returns. Credit quality, maturity, embedded options and liquidity can also affect price. Holding a bond to maturity does not remove issuer default risk.

STEP 1

Separate the contract from the price

A fixed-rate bond’s promised payments can remain unchanged while its market price moves. Buyers compare those payments with alternative opportunities, issuer risk and trading conditions. The contract’s coupon is not necessarily the return a new buyer earns.

STEP 2

Discount the payments

A future payment is converted to present value using a chosen rate. Higher required return means a lower present value for the same payment. Multiple coupon payments each have their own timing in a full calculation.

Follow a worked example.

A simplified bond pays $100 in one year and nothing before that. At a 5% discount rate its price is 100/1.05 ≈ $95.24. At 6%, its price is 100/1.06 ≈ $94.34. The promised payment is unchanged; its present value falls.

Walk it through, one step at a time

  1. A simplified default-free claim pays $110 in exactly one year and nothing else.
  2. At a 10 percent required return, present value is $110 ÷ 1.10 = $100. At 5 percent, it is about $104.76.
  3. The payment did not change. Its price changed because the comparison return changed; real bonds add credit, liquidity and other complications.

Where people get stuck

A coupon rate is not the same as yield to maturity, and a bond fund does not behave exactly like one bond held to maturity.

Now try it yourself.

Pause before opening each answer. Explain your reasoning in your own words.

1. Check the core idea

Why can a fixed-rate bond lose market value even if its promised payment is unchanged?

Reveal the answer & reasoning

Other available yields can rise, reducing what buyers will pay today for the same future payment.

2. Apply what you learned

Can you compare a bond’s coupon directly with another asset’s expected total return?

Reveal the answer & reasoning

Not on a consistent basis. Coupon omits purchase price and other cash-flow effects; expected returns also carry uncertainty and different assumptions.