All investments seem more volatile these
days, including bonds. To help control volatility in your bond
portfolio, carefully consider maturity dates before purchase.
Bonds can be purchased with maturity dates ranging from several
weeks to several decades. Before deciding on a maturity date,
review how that date affects investment risk and your ability
to pursue your investment goals.
Typically, yield increases as the maturity
date lengthens, since you assume more risk by holding a bond for
a longer time. Investors are often tempted to purchase bonds with
long maturity dates to lock in higher yields, but that strategy
should be used with care. If you purchase a long-term bond knowing
you'll need to sell before the maturity date, interest rate changes
can significantly affect the bond's market value. Two fundamental
concepts about bond investing apply:
- Interest rates and
bond prices move in opposite directions. A bond's price rises
when interest rates fall and declines when interest rates rise.
The existing bond's price must change to provide the same yield
to maturity as an equivalent, newly issued bond with prevailing
interest rates. You can eliminate the effects of interest rate
changes by holding the bond to maturity, when you will receive
the full principal amount.
- Bonds with longer maturities
are more significantly affected by interest rate changes. Since
long-term bonds have a longer stream of interest payments that
don't match current interest rates, the bond's price must change
more to compensate for the interest rate change.
Although you can't control interest rate
changes, you can limit the effects of those changes by selecting
bonds with maturity dates close to when you need your principal.
In many cases, you may not know exactly when that will be, but
you should at least know whether you are investing for the short,
intermediate, or long term.
