FINANCIAL FOCUS: If rates rise, here's what to do with bonds

Joe Faulk

Joe Faulk

Published: Thursday, June 12, 2014 at 10:45 AM.

Interest rates are at historic lows, but they will eventually rise. If you invest in fixed-income vehicles, such as bonds, what might higher rates mean for you?

As is almost always the case in the investment world, there’s no simple answer.

First, it’s important to distinguish between short-term and long-term interest rates. The Federal Reserve is determined to keep short-term rates low until unemployment improves; in the meantime, longer-term rates may well rise.

Depending on your situation, a rise in long-term rates can present opportunity and concern. 

Rising rates can mean greater income if you invest in newly issued bonds. However, if you already own longer-term bonds, and rates rise, your bonds' value will fall. That’s because other investors won’t want to pay full price for your bonds when they can get new ones at higher rates.

Even if your long-term bonds' value falls, isn’t it worthwhile to hold on to them? As long as your bond doesn’t default — and if the bond is considered “investment grade,” default is unlikely — you will get a steady source of income and you’ll receive your bond's full value back at maturity.

Aren’t these valuable benefits?

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