Bond value is the price someone would pay for your bond right now, and it moves based on interest rates and how much time is left until it matures

A bond's value is not fixed, even though its maturity date and final payout are. The amount you could sell a bond for today depends on three things: the interest rate the bond pays, the current interest rates in the market, and how long until the bond matures. If market interest rates have dropped since you bought the bond, your bond becomes more valuable because it pays a higher rate than new bonds do. If rates have risen, your bond is worth less because it pays less than new bonds.

When you hold a bond until maturity, you get back exactly what you paid for it plus all the interest payments. But if you need to sell before maturity, the price you get depends on what buyers are willing to pay—and that price moves with interest rates.

Key Takeaways

  • A bond's market value changes when interest rates change, even though the amount you get at maturity stays the same.
  • When interest rates drop, existing bonds become more valuable because they pay more than new bonds; when rates rise, they become less valuable.
  • The closer a bond is to maturity, the less its price moves when interest rates change.
  • You can calculate a bond's current value by adding up all the payments you will receive and discounting them back to today's dollars.

Why interest rates move bond value up and down

Imagine you bought a bond that pays 3 percent interest per year. Six months later, the Federal Reserve raises rates, and new bonds now pay 5 percent. Your bond still pays 3 percent—that never changes. But if you wanted to sell it, a buyer would say, "Why would I pay full price for a 3 percent bond when I can buy a new 5 percent bond instead?" So you would have to sell at a discount—a lower price—to make your bond attractive.

The opposite happens when rates fall. If new bonds now pay only 1 percent and yours pays 3 percent, buyers will compete to buy it. You could sell it for more than you paid. The bigger the gap between your bond's rate and the new market rate, the bigger the price swing.

How time to maturity affects price changes

A bond that matures in one month is worth close to its face value no matter what interest rates do, because you are getting your money back so soon. A bond that matures in 20 years swings much more in price when rates change, because buyers are locking in that interest rate for a long time.

Think of it this way: if you own a bond paying 3 percent and rates jump to 5 percent, you are stuck with 3 percent for 20 years. That is a big loss compared to what you could have earned. But if you are stuck with 3 percent for only one month, it barely matters. So long-term bonds are more sensitive to rate changes than short-term bonds.

The calculation behind bond value

Bond value is calculated by taking every payment you will receive—both the interest payments and the final principal—and figuring out what they are worth in today's dollars. This is called discounting the payments. The discount rate used is the current market interest rate for bonds like yours.

Here is a simplified example. Say you own a bond that pays $30 per year in interest and returns $1,000 at maturity in two years. If the current market rate for similar bonds is 4 percent, you would calculate the value by asking: what is $30 next year worth today at a 4 percent rate? What is $30 the year after worth today? What is $1,000 at maturity worth today? Add those three amounts together and you have the bond's current value.

You do not need to do this math yourself. Bond prices are published daily by financial data services, and your bank or broker can tell you what your bond is worth on any given day.

The difference between face value and market value

Face value (also called par value) is the amount printed on the bond—usually $1,000 or $5,000. This is what you get back when the bond matures, no matter what. Market value is what someone would pay for the bond today if you sold it. These two numbers are the same only on the day the bond is issued or if interest rates have not changed.

A bond trading at a premium means its market value is higher than its face value—this happens when interest rates have fallen since the bond was issued. A bond trading at a discount means its market value is lower than its face value—this happens when rates have risen. The closer the bond gets to maturity, the closer its market value creeps back toward its face value, because you are about to receive that face value in cash.

What affects bond value in the real world

Interest rates are the main driver, but other things matter too. If the organization that issued the bond—a company or government—becomes less creditworthy, the bond's value drops because buyers demand a higher interest rate to compensate for the risk. If the bond is called early (some bonds let the issuer pay them off before maturity), the value stops rising even if rates keep falling, because you lose the benefit of those high interest payments.

Inflation also affects bond value. If inflation rises, the money you get back is worth less in real purchasing power, so buyers will pay less for the bond. Supply and demand in the bond market can also move prices, though this effect is usually smaller than the interest rate effect.

Why bond value matters when you sell before maturity

If you plan to hold a bond until it matures, the market value does not affect you—you get your face value back plus all interest payments, period. But if you need to sell early, you get whatever the market value is on the day you sell. If rates have risen since you bought it, you will get less than you paid. If rates have fallen, you will get more.

This is why bonds are considered lower-risk than stocks for money you need in a specific timeframe. If you buy a bond and hold it to maturity, you know exactly what you will get. But if you might need to sell early, rising interest rates are a real risk to your principal.

Frequently Asked Questions

If I hold a bond until maturity, does the market value matter?

No. You will receive the face value plus all interest payments regardless of what the market value was. Market value only matters if you sell before maturity.

Why does my bond's value go down when interest rates go up?

New bonds issued at the higher rate become more attractive to buyers. Your bond, which pays the old lower rate, is worth less because it pays less than new bonds. A buyer will only take it at a discount.

Can a bond's value go negative?

No. The worst that can happen is the value drops to zero if the issuer defaults and you lose your money. But the market value itself cannot be negative—it just means no one wants to buy it at any price.

How often does bond value change?

Bond values change every day the bond market is open, as interest rates and market conditions shift. You can check your bond's current value through your bank or broker, though the price you could actually sell for may differ slightly.

Is a bond worth more if it has a higher interest rate?

Yes, if market rates have fallen below that rate. A bond paying 5 percent is worth more than a bond paying 3 percent when new bonds only pay 3 percent. But if new bonds pay 6 percent, the 5 percent bond is worth less than face value.