Changes in interest rates can affect bond prices. Generally, when interest rates rise, prices of existing bonds fall because demand for them decreases compared to the newly issued, higher interest paying bonds. And when interest rates fall, prices of existing bonds typically rise because demand for them increases compared to the newly issued, lower interest paying bonds.
Over the past several years, interest rates have risen, and as a result, many bonds and other bond-holding securities such as mutual funds and unit investment trusts have seen their values go down. Many economists believe interest rates will continue to rise in the coming years. If you own bonds or have money in a bond mutual fund, now is the time to contact your investment professional to learn more about interest rate risk.
Depending on your investment objective, time horizon and risk tolerance, it may make the most sense to keep your bonds. Or it may be time to rebalance. Your investment professional can help you decide what may be the right move for you.
Here are a few things to keep in mind when thinking about bonds:
- Bonds with higher duration are more likely to fluctuate – positively and negatively – with interest rate changes.
- If you do keep the bond until it matures, you can likely recoup the face or par value of the bond, unless the company goes bankrupt or fails to pay.
- Interest rate risk isn’t the only risk factor for bonds.
- Consult an Investment Professional.
To learn more about interest rates and how they affect your bond portfolio, contact a Fifth Third investment professional.