Core answer: Bond prices move OPPOSITE to interest rates: a 10-year bond paying 3% coupon falls ~8–9% in price when market rates rise to 4% (duration ≈ 8.5). Price = present value of all future coupons + principal. When market rate = coupon rate, price = par (100); market above coupon → discount; below → premium. This is why "risk-free" bonds lost money in 2022 — rate risk is real.
The price-yield seesaw
Bond price = Σ coupon/(1+y)ᵗ + face/(1+y)ⁿ, where y = market yield.
A 3% coupon, 10-year, face ¥100:
| Market yield | Price | vs par |
|---|---|---|
| 2% | ¥108.98 | premium |
| 3% | ¥100.00 | par |
| 4% | ¥91.89 | discount |
| 5% | ¥84.56 | deep discount |
Duration: the sensitivity number
Modified duration ≈ % price change per 1% yield change. 10-year bond duration ≈ 8.5 → rates +1% → price −8.5%. 2-year bond duration ≈ 1.9 → only −1.9%. The longer the bond, the bigger the swing. Money needed within 2 years has no business in 10-year bonds.
Worked examples
Example 1 — 2022's lesson. US 10-year Treasury yield went 1.5% → 4.2% (+2.7%): long-bond funds (duration ~17) fell ~25% — "safe" assets, equity-sized losses. China's 2024 was the mirror: yields fell, 30-year bond funds returned +15%+.
Example 2 — Hold-to-maturity immunity. Bought a 3% 5-year bond at par; rates jump to 4% (price −4.5%). If you hold to maturity, you still get every coupon + ¥100 back exactly; the loss exists only if you sell early. Match bond maturity to your spending date and rate risk vanishes.
Example 3 — Laddering. Split ¥500k into 1/2/3/4/5-year bonds (¥100k each): each year one matures, reinvest at then-current rates. You harvest rising rates automatically and never face a single big duration bet.
Example 4 — Credit spread. A corporate bond yielding 6% vs treasury 2.5%: the 3.5% spread is compensation for default risk; a "high-yield" 9% bond with a shaky issuer is priced for a real chance of loss — yield is never free.
Common mistakes and myths
- "Bonds can't lose money" — only if held to maturity AND the issuer pays; mark-to-market, they swing daily.
- Duration blindness — buying 30-year bond funds for a 1-year goal is a rate bet, not saving.
- Confusing coupon with return — your total return = coupons + price change; a 3% coupon bond sold after a rate rise returns less than 3%.
- Ignoring reinvestment risk — rates fall and your coupons reinvest lower; ladders and matching handle both directions of risk.
- Chasing yield into credit — 8% "wealth-management bonds" from weak issuers are equity risk in costume; the 2020–2022 Chinese property-bond defaults proved it expensively.