Another source of market risk for an investment bank is the change in value of bonds they hold on their balance sheet. Bonds tend to be less riskier than equities since they usually pay predictable coupons, many of which are paid at a fixed rate on a fixed date, they have a clearly identifiable maturity date and they rank above equities in the capital structure should the issuer go into administration. However, prices of bonds do change as interest rates change, meaning market risks for bonds is driven by volatility of interest rates and credit spreads. The most significant price mover is interest rates. The further into the future that a cashflow extends, the greater the impact on bond prices from changing interest rates, both interest and principle.

Understanding how sensitive a bond's price is to changes in interest rates first requires the bond price to be calculated. This is done by discounting the cash flows of a bond using the yield to maturity. The yield to maturity is the expected return the bond gives the investors that hold on to the bond until maturity. This will be used as a discount rate. In this example, the yield to maturity is 4%. The price of this three year annual 5% coupon bond is 102.78. Conceptually, the bond's price is higher than 100 since investors only want a 4% return, the yield, despite the bond paying a coupon of 5%. Since the bond is paying more than the investors want, they will be willing to pay more than the par value of 100 to buy the bond.