Ken Himmler.com

In today’s volatile market environment, more and more investors are seeking refuge in stability. When most people think about investment bonds they conjure up words such as safe, steady, reliable.

In reality, it is still possible to lose money in bond investing which is why investors are urged to diversify their bond investments. By building a portfolio of investment bonds with varying interest rates, maturity dates, and associated risks such as creditworthiness, you can better protect the overall return on your investment.

Many people are aware of the obvious risks in bond investing, such as the issuer going bankrupt or defaulting on scheduled interest payments, but what about the less obvious risks that can still impact bond investment return?

While it’s true that the interest payments you will receive from owning an investment bond will be steady, the actual return that you receive when you sell your bond can vary. Let’s explore how the risk of interest rate fluctuation can influence the profit or a loss you take on your bond investments.

You may think that a higher interest rate would equate to a higher return, but the opposite is true in bond investing. When interest rates rise, it is highly probable that the issuer will offer new bonds with a higher paying interest rate. If this happens, then the value of older, lower-yielding bonds will take a hit. Given the choice, investors will opt for the higher interest return and this will impact your ability to sell.

It’s important to note that this fluctuation only applies to investors who opt to sell or trade bonds before their maturity date. If you hold an investment bond to maturity then you will be paid the full face value of the bond. That said, planning to hold a bond to maturity still doesn’t guarantee a return. In fact, interest rate fluctuations, especially a fall, can still impact your bond investments.

For example, if interest rates fall significantly, as they certainly have over the past year, bond issuers may opt to exercise their right to call in their bonds even before maturity. In our next post, we’ll explore why this happens and how exposed you are to the risk of having a bond called in early by an issuer.
 

Tags: Conservative Investments, Income for Retirement, Interest, Investment Bonds

Disclosure: Any comments or posts in this blog should be considered opinions of the authors of such comments. This site nor any of its authors or commenters offer any investment, legal, insurance or tax advise. Please consult with a licensed professional for any such advise. All information contained within this site is the copyright material of the site owners and any copy, reproduction or use of any kind is prohibited by law and your honesty. Any post or comment is also the copyright material of the site owners. If you post or comment you are agreeing to transfer all rights to the site owners.

Leave a Reply

You must be logged in to post a comment.