How Interest Rate Changes Impact Bond Prices

Know the price consequences before buying fixed-income securities in today’s market.

Fixed-income, long-term investment vehicles, including corporate bonds, tax-exempts, zero coupon bonds, Treasury notes and bonds, and any and all 2- to 30-year debt instruments, do have a place in your portfolio. But don’t purchase bonds or change the percentage mix of your portfolio without considering the possible consequences on the price of these securities.

Here are some facts to discuss with your broker before buying any fixed-income securities.

Changes in interest rates can negatively and substantially impact the prices of bonds and other long-term, fixed-income securities, such as certificates of deposits, corporate bonds, preferred stocks, tax-exempts, zero coupon bonds, utility stocks, etc.

When interest rates rise, bond prices fall. When interest rates decline, bond prices rise.

The longer the term (maturity) of the bond, the greater the impact of a change in interest rates.

The bond could be called for redemption by the issuer at a price below its current market value.

The rating on the bond, e.g., Moody’s, could be lowered which would have a negative impact on its current market value. The longer the term of the bond, the greater the impact of a rating change.

An overall movement of money from bond to stock investments will usually cause bond prices to drop.
Best strategy: Be testogel kopen patient; buy short-term securities when interest rates are low and long-term securities when they’re high. Know the principal terms of the security, e.g., the call and redemption provisions, and be aware of a bond’s rating which could be lowered because of changes in the company’s fundamentals, e.g., current losses rather than profits.

Relevant Resource:
Resource Report #38: How Interest Rate Changes Impact Bond Prices with an Example of the Impact on Long-Term Securities at various Interest Rates