Common Bond Market Questions

Bond markets are very dynamic and feature frequently changing interest rates that are influenced by many different factors like Federal Reserve policy, demand and supply of credit, economic conditions, fiscal policy, inflation, exchange rates and market psychology. Presently, the increase in interest rates and the probability of economic recovery is influencing the prices of bonds. When interest rates change, the value every bond in the market also changes. If you want to purchase bonds, or have just purchased some, you should understand how increasing interest rates will affect your bonds.
How Will Higher Interest Rates Affect Bonds?

Interest rates are now on the rise and this means that the yields on your bonds will drop.
Does Every Bond Lose the Same Value When Rates Increase?

No, interest rate changes do not affect all bonds in the same way. Generally, the longer the maturity on the bond, the more is it affected by changes in interest rates. Also, the lower the ‘coupon’ rate of the bond, the more it is affected by interest rate changes.
What Should I Do with My Bonds When Rates Increase?

If you decide to purchase a bond and keep it until it matures then the increase in rates will not affect the income you get from it – you simply get the face value of the bond.
What Happens When Rates Increase and I Need to Trade My Bonds?

If you must trade your bonds during a time where rates are increasing, you should know that you will have to trade them at for loss.
What Happens If I Trade My Bonds When Rates Go Down?

If you rates have gone down since you purchased your bonds then the value of those bonds will have increased, giving you capital gain.
If Rates Increase, What Happens to My Bond Fund?

Because bond funds do not have a particular maturity date, it is likely that the returns will decrease. The return is influenced by interest rate payments as well as price changes. If the rates increase, the bond values that are held by the fund will drop and decrease the return. However, the bonds will continue to provide the fund with interest payments that will be passed to investors so it will maintain its yield.
Are There Other Risks Involved in Bond Markets?

Yes, all investments have some risk of loss involved. If you invest in bonds, besides government guaranteed securities, you should know that the return is tied to market changes and its credit. The higher the potential return, the higher the risk. On the other hand, safer investments offer lower returns. You may choose to purchase a variety of bonds like U.S. Treasury securities which are supported by the credit of the U.S. government and do not carry any credit risk or bonds that are speculative and just below investment grade.
Should I Invest in Bonds?

Most financial advisors recommend that you diversify your investment portfolio with stocks, cash in different percentages and bonds depending on your individual goals and circumstances. However, if you want to purchase bonds and hold them until they mature, you will get a predictable series of payments. You can purchase bonds to increase or save your capital or to create a reliable interest income. Whether you are saving for a new home, retirement, your children’s college or other financial goals, investing in bonds can help you reach your goals.