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, the existing bond becomes
less valuable because of the lower interest payments, causing
the price to decrease. Since you 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 price 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.
[PRINTER FRIENDLY VERSION]
|
|
|  |
|
|
About David K. Sebastian
David K. Sebastian, CFP®, and his team of experts at The Physicians Wealth Management Group specialize in working with individual physicians and group medical practices. David is considered to be one of the top financial advisors in the country with more than twenty five years of Wall Street experience as a chief investment officer, portfolio manager, institutional bond trader, and estate planning, benefits planning and retirement consultant.
Commitment to his clients’ financial needs and well being is a primary motivation for David.
The Physicians Wealth Management Group was specifically created to address and manage all of the unique financial challenges that doctors are facing both individually and through their group medical practices.
Feel free to contact me at
www.physicianswealth.com or
dsebastian@sfr1.com
or call me at (973) 285-3600
|
|
|
