Investing In the Bond Market
Gail Liberman and Alan Lavine of the Boston Herald offer the following “Rules of the Road for Bond Prices and Interest Rates”:
Consider these rules when you invest in bonds.
Bond prices and interest rates move in opposite directions. Bond prices fall when interest rates rise and vice verse.
Selling a bond? The longer its maturity, the greater the price change, based on interest rates. When interest rates rise, long-term bonds lose more value than short-term bonds and vice verse.
The lowest-risk bonds, if you hold them to maturity, are U.S. Treasury bonds. Sell them early, however, and their value also fluctuates, based on interest rates.
If interest rates rise by 1 percent, here’s a general idea of how much the value of your bond may drop if you sell it.
A two-year U.S. Treasury bond:-2 percent.
A five-year U.S. Treasury bond: -4.25 percent.
A 10-year U.S. Treasury bond: A little over -7 percent.
A 20-year U.S. Treasury bond: -10 percent.
A 30-year U.S. Treasury bond: -11.5 percent in value.
Keep in mind that the interest your bond pays should offset some of the decline.
Spouses Gail Liberman and Alan Lavine’s latest book is Rags to Retirement (Alpha Books). You can e-mail them at MWliblav@aol.com.