Investing term

What is Interest-rate risk?

The risk that rising interest rates push existing bond prices down, forcing a holder who sells before maturity to take a loss.

Interest-rate risk is the danger that rising rates push the market price of existing bonds down. When new bonds are issued at higher rates, your older, lower-coupon bond becomes less attractive, so its price must fall until its yield matches the new market rate — the inverse relationship between bond prices and rates.

Crucially, this risk only bites if you sell before maturity: hold a sound bond to maturity and you still get your face value back, whatever the price did in between. It hits long-duration bonds hardest, because their fixed payments are locked in for longer, so a rate change swings their price more. Interest-rate risk is often the biggest day-to-day driver of high-quality bond prices — more than default risk for a solid issuer — which is why duration is such an important number for bond investors, and why long-dated bonds can post real losses in a rising-rate year.

Rates up, existing bond prices down
90100110rates rise……price fallsrates ↑bond price ↓Rates and bond prices move opposite ways — a paper loss only if you sell before maturity.

When rates rise, newly issued bonds pay more, so your older, lower-coupon bond's price falls until it too yields the market rate. The loss only bites if you sell before maturity, and hits long-duration bonds hardest.

For example

You hold a bond paying 3% when rates rise to 5%; new bonds are more attractive, so your bond's price falls until it too yields 5% — a paper loss you only realise if you sell before maturity.

Learn it by doing

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Why it matters to you

Interest-rate risk matters because it's the reason 'safe' bonds can still lose money in a given year, surprising investors who assumed bonds don't fall. It explains why rising rates hurt existing bondholders, why long-duration bond funds can post double-digit losses, and why duration is the key risk gauge for bonds. Understanding that the risk only matters if you sell before maturity — and that it scales with duration — is what lets you match your bond holdings to your horizon and rate outlook.

⚠ Assuming bonds can't lose money

Bonds are steadier than stocks, but rising rates push existing bond prices down, so a bond fund can post real losses in a year — a shock to investors who thought bonds were always safe. The risk is worst for long-duration bonds. Holding to maturity avoids the loss, but a long-duration bond fund sold in a rising-rate year can disappoint sharply.

Frequently asked questions

What is interest-rate risk?

Interest-rate risk is the danger that rising interest rates push the market price of existing bonds down. When new bonds are issued at higher rates, older lower-coupon bonds become less attractive, so their prices fall until their yields match the market — the inverse relationship between bond prices and rates.

Why do bond prices fall when interest rates rise?

Because a bond's coupon is fixed. When rates rise, newly issued bonds pay more, making your older, lower-paying bond less attractive. Its price must fall until its yield matches the new market rate, so a buyer earns the going return. This inverse relationship is the heart of interest-rate risk.

Does interest-rate risk matter if I hold to maturity?

Much less — if you hold a sound bond to maturity, you receive its full face value regardless of how its price moved in between, so the interim price swings don't affect your payout. Interest-rate risk mainly bites if you must sell before maturity, and it hits long-duration bonds the hardest.

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