Why Bond Prices Fall When Yields Rise (And Why a Longer Bond Falls More)
4 min read
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4 min read
You buy a government bond. A month later, interest rates go up. You check the price and it has dropped.
You did not do anything wrong. The bond still pays what it promised. So why did the price fall?
This post explains bond price vs yield with one small example. A bond is a loan you give to a government or company. They pay you interest, called the coupon, and return your money on a set date. The yield is the return you earn if you buy at today's price and hold to the end.
The SEC's investor education arm says it plainly: when market interest rates go up, the prices of fixed-rate bonds generally go down (Investor.gov, SEC, seen through search on 30 October 2026).
Here is why. Say you hold a bond that pays 6% a year. Then the market changes, and new bonds pay 7%.
Nobody wants your 6% bond at full price when a 7% bond is for sale. To sell yours, you must lower the price. The lower price makes up the gap.
When rates fall, the reverse happens. Your 6% bond now looks better than new ones, so its price rises.
We will use two invented bonds. Both have a face value of Rp100 and pay a 6% coupon once a year. Both trade at Rp100 when the market yield is 6%. All numbers are NetWort arithmetic, checked in Python.
Now the market yield jumps from 6% to 7%.
| Bond | Price at 6% yield | Price at 7% yield | Change |
|---|---|---|---|
| 1-year | 100.00 | 99.07 | -0.9% |
| 10-year | 100.00 | 92.98 | -7.0% |
Same coupon. Same yield move. Very different loss.
If you held Rp100 juta of each, the 1-year bond would lose about Rp0,9 juta on paper. The 10-year bond would lose about Rp7,0 juta.
A 1-year bond is back to Rp100 in twelve months. The low price is temporary. You get your money back soon and can buy a new 7% bond.
A 10-year bond is stuck at 6% for a decade. You are locked into a lower rate for much longer, so the price must drop more to make up for it.
Finance people measure this with duration. In plain words, duration tells you how much a bond's price moves when yields move. It is shown in years, but it is not the same as the maturity date (Fidelity, seen through search).
Fidelity gives a rule of thumb: if rates rise 1 percentage point, a bond or fund with a 5-year duration would likely lose about 5% of its value. Longer maturity usually means longer duration (RBC Global Asset Management, seen through search).
Our example fits this. The 10-year bond lost about 7% for a 1 point rise.
Falling yields help. If the 10-year yield drops from 6% to 5%, our invented bond rises about 7,7% to 107,72. The 1-year bond rises only about 1%.
So long bonds carry bigger swings in both directions. That is the trade-off, not a flaw.
One more point. If you hold a bond to maturity, you still get the face value back, assuming the issuer pays. The price drop only becomes a real loss if you sell early.
Yields change with central bank decisions, inflation and government borrowing. To see how Indonesian bonds respond, read our guides on ORI vs SBR coupons and what an inverted yield curve means for Indonesia. Both build on the idea in this post.
Open the Macro page and look at the current rate and yield data. Then ask yourself one question: if yields moved 1 point from here, which of my holdings would feel it most?