Bonds and Interest Rate Changes.
With interest rates at such low levels, you might be wondering what could happen to your bond portfolio if interest rates rise. Basically, interest rate changes affect bond prices as follows:
- Interest rates and bond prices move in opposite directions. The price of a bond will decrease in value when interest rates rise and increase in value when interest rates fall. The price of an existing bond changes to provide the same return as an equivalent, newly issued bond at prevailing interest rates. If interest rates are higher than the rate on an existing bond, that bond becomes less valuable because of the lower interest payments, causing the price to decrease. Since you’ll receive the full principal value at maturity, holding a bond until maturity eliminates the impact of interest rate changes.
- Interest rate changes have a more dramatic effect on bonds with longer maturities. Since long-term bonds have a longer stream of interest payments that don’t match current interest rates, their prices must change more to compensate for those interest rate changes.
- Bond price changes are less significant for bonds with higher coupon rates. Bonds with coupon interest rates near or above current interest rates will experience the least amount of price fluctuation.
By understanding the effects of interest rate changes on bond prices, you can make more informed decisions regarding your bond portfolio. Please call if you would like help with your bond portfolio.
Copyright © Integrated Concepts 2015. Some articles in this newsletter were prepared by Integrated Concepts, a separate, nonaffiliated business entity. This newsletter intends to offer factual and up-to-date information on the subjects discussed, but should not be regarded as a complete analysis of these subjects. The appropriate professional advisers should be consulted before implementing any options presented. No party assumes liability for any loss or damage resulting from errors or omissions or reliance on or use of this material.