How interest rates affect bond prices

Sedan botten föll ur aktiemarknaden 2008 har investerare flyttat pengar från aktier till obligationsfonder. Sedan 2007 har det i USA investerats 1,39 biljoner dollar i obligationsfonder mot 193 miljarder dollar i aktiefonder. Den mest logiska förklaringen är ett försök att hitta inkomst och säkerhet, men är obligationer verkligen säkra? För att utforska den frågan måste vi förstå var räntorna är nu, var de kommer att vara i framtiden och hur förändringar i räntorna kommer att påverka obligationer.

Since the bottom fell out of the stock market in 2008, investors have been shifting money from stocks to bond funds. Since 2007, $1.39 trillion has been invested in bond funds in the US compared to $193 billion in equity funds. The most logical explanation is an attempt to find income and safety, but are bonds really safe? To explore that question, we need to understand where interest rates are now, where they will be in the future and how changes in interest rates will affect bond prices.

Interest rates

In response to the financial crisis, the Federal Reserve (Fed) cut the federal funds rate to a historic low of 0% – 0.25% and they have remained there ever since. In its most recent guidance, the Fed announced its intention to keep interest rates at that low level until the unemployment rate falls below 6.5%, which they predict will happen in 2015. The accuracy of their estimate can be argued but they are certainly not the key issue. What is important is that interest rates are as low as they will get and the next interest rate change will be up. When that happens, bond investors could find their portfolios in trouble.

Bond prices

The rule is simple. When interest rates go up, bond prices go down. Suppose you buy a $1000 bond today that pays 5% interest. Each year the bond will pay $50 until the bond matures and then you get $1000 back. You pay $1000 for the $1000 bond. In investment terms, you have just bought the bond at par value. Tomorrow, the same bond issuer raises the interest rate on new bonds to 6%. These bonds pay $60 each year until the face amount is returned to the investor. If someone else is thinking about buying a bond, they would obviously choose the 6% bond for their $1000 over your 5% bond unless you were willing to sell your $1000 bond for less than $1000. At any discounted price, the 5% bond is just as attractive as the 6% bond for $1000. The relationship between bond prices and interest rates: Why do bond prices move inversely to changes in interest rates? Bond fund buyers need to be aware (or should they be wary?). There is no argument that interest rates will go up. The only unknown is when it will happen. When it does, the prices of the bonds in bond funds will fall and fund values will fall.

Key words

– Par value – the face amount of a bond. It is what an investor paid for the bond when it was originally issued and what will be repaid to an investor when the bond matures. – Discount Bond – a bond that is currently trading for less than its face value – Premium Bond – a bond that is currently trading for more than its face value.

About the Vikingen

With Vikingen’s signals, you have a good chance of finding the winners and selling in time. There are many securities. With Vikingen’s autopilots or tables, you can sort out the most interesting ETFs, stocks, options, warrants, funds, and so on. Vikingen is one of Sweden’s oldest equity research programs.

Click here to see what Vikingen offers: Detailed comparison – Stock market program for those who want to get even richer (vikingen.se)