Skip to content
Financial Context Wiki

Treasury Bonds: Coupons, Duration, Yield, and Long-Term Rate Risk

For educational purposes only; not investment advice.

Direct answer

Section titled “Direct answer”

A Treasury bond is a marketable, fixed-rate U.S. government debt security with an original maturity longer than ten years. Treasury currently describes bonds as 20- or 30-year securities. They normally pay interest every six months and return face value at maturity.

Low credit risk does not mean low price risk. Because much of a long bond’s cash flow arrives far in the future, a change in market yields can materially change its present value. An investor who holds to maturity has a defined nominal coupon-and-principal schedule, but one who sells earlier receives the market price. Inflation can also reduce the purchasing power of every nominal payment.

Why yields and prices move in opposite directions

Section titled “Why yields and prices move in opposite directions”

A bond’s price is the present value of its remaining coupons and principal. When the discount rate demanded by the market rises, those present values fall; when it falls, they rise. The coupon rate is fixed against face value, while current yield and yield to maturity depend on the market price.

Modified duration gives a first-order estimate for a small yield change:

approximate percentage price change ≈ -modified duration × change in yield

Longer maturity and lower coupon generally produce greater duration. Convexity captures the curvature omitted by the linear estimate, so the duration approximation becomes less exact for large rate moves. Yield changes also need not be parallel: short-, intermediate-, and long-term rates can move by different amounts.

Long-term nominal yields can be viewed as reflecting expected future short rates, expected inflation, real-rate conditions, term premium, and market supply and demand. A policy-rate cut therefore does not mechanically guarantee a long-bond gain. Long yields can rise if inflation expectations or term premium rise by more.

Duration and total-return example

Section titled “Duration and total-return example”

Assume a long Treasury trades at $100 and has modified duration of 18. If its yield rises by 1 percentage point, or 0.01, the duration-only estimate is:

-18 × 0.01 = -18%

The estimated price becomes roughly $82 before adding the convexity adjustment, accrued interest, coupons received, and trading costs. A 1-point yield decline gives a roughly positive 18% first-order estimate, but convexity means the actual up and down moves are not perfectly symmetric.

Total return over a holding period combines price change, coupon income, and reinvestment of coupons. Yield to maturity is not a guaranteed interim return: it assumes the bond is held to maturity, promised payments occur, and coupons can be reinvested at the assumed rate. A bond bought above face value can still have a positive yield even though its price converges toward face value, because coupons contribute to return.

A long Treasury ETF is different from one bond. The fund continually maintains a maturity exposure, charges expenses, and has no single date on which an investor’s shares return to face value. Its high-duration exposure can therefore persist.

Risk checklist

Section titled “Risk checklist”
  • Interest-rate risk: a higher required yield can cause a large mark-to-market loss.
  • Inflation risk: fixed nominal payments may buy less; nominal principal protection is not purchasing-power protection.
  • Reinvestment risk: future coupons may earn less than the yield assumed when the bond was purchased.
  • Horizon mismatch: money needed before maturity may have to be raised at an unfavorable market price.
  • Yield-curve risk: the relevant long-term yield may move differently from the policy rate or short-term bills.
  • Liquidity and execution risk: spreads and depth can deteriorate during stress, even in a deep market.
  • Opportunity cost: holding a below-market coupon after yields rise can constrain future choices even if the bond is not sold.

Before buying, record the CUSIP, maturity, coupon, clean and dirty price, accrued interest, yield measure, duration, settlement, call status, costs, tax treatment, planned holding period, and cash need. Stress both rising-yield and renewed-inflation scenarios rather than relying on one rate forecast.

Common misconceptions

Section titled “Common misconceptions”
  • “Treasuries have no risk.” Their credit and interest-rate risks are different.
  • “The coupon rate is my current return.” Purchase price changes current yield and yield to maturity.
  • “Rate cuts always lift long bonds.” Inflation expectations and term premium can move long yields the other way.
  • “Holding to maturity erases every loss.” It can resolve market-price fluctuation for the bond’s nominal cash flows, not inflation or opportunity cost.
  • “A duration of 18 guarantees an 18% move.” It is a local approximation, not a forecast or loss limit.
  • “A long-bond ETF will mature back to par.” A rolling portfolio does not provide that individual maturity event.
Section titled “Related topics”

Authoritative sources

Section titled “Authoritative sources”