Bonds Interest Rate

What happens to my bonds if interest rates go up?

I own different types of bonds, if price falls then rates go up, so is it good to hold for interest rate payments or sell if prices fall?

Public Comments

1. No one can answer this question for you. It depends on your goals and the type of bonds you have. Many people will hold to maturity. That way principle is returned. Others will get out and find an alternate investment. What most people do is have an exit plan when they purchase a stock or bond. That way they don't have to make these decisions under the pressure of losing money.
2. Generally speaking, the market value of existing bonds declines when interest rates rise. If you're holding them for the interest income, however, they still pay.
3. In general, you should not buy bonds directly if your intention is not to hold them until maturity. Bonds are just a volatile as stocks if you price them every day. So, don't price them! (I tell my clients to price US Treasury and agency bonds at face value or price paid (zeros, for example) until they get close to retirement. Corporates and Muni's -- once a year) The secret to buying bonds is to buy the interest rate you need to make your portfolio work at the highest quality only or put it in cash. If you do this you never have to "worry about" your bond portfolio again (the return you want is already baked into the bond).
4. The value of your bond declines. As interest rates go up, bond values go down. As interest rates go down, bond values rise. If you do not need to sell your bonds, don't worry about them, they will continue to earn interest. The reason is because - let's say you have a bond earning 3% interest with a face value of $1,000, with six years remaining until maturity. In one year, it would earn $30 in interest. $30/yr x 6 years = $180 interest earned. If current interest rates are currently 4%, someone could earn $40 in a year on a current $1,000 bond. $40/yr x 6 years = $240 interest earned. Why would someone want to buy your bond? In order to entice them to buy the bond, you might drop the price. Rather than sell the bond for the full face value of $1,000, you might sell it for $900.00. When the bond matures, the buyer will receive the $1,000. So, on top of the 3% interest they've earned, they've also made an additional $100 when the bond matures. $30/yr interest x 6 years + $100 ($1,000 f/v - $900 purchase price) = $280.00 in income. This makes your bond look more attractive to potential investors - in this example they could make more money buying your bond with the 3% interest rate then a current 4% bond. You'd only do this if you need either need the cash, or maybe have found an opportunity for a much better investment yourself. On the other hand, if interest rates decline, you may be able to sell your bond for a premium - or more than the face value. A potential investor might pay $1,100 for your $1,000 bond if it is earning significantly more interest than they can receive elsewhere. Cashing in the bond would yield them the face value of $1,000 (which is a $100 loss), but the increased interest they'd earn would make up the difference, and hopefully then some. So, I would only sell the bonds if you have the potential of earning better interest someone else and that increased interest will make up the loss you will incurr in selling the bonds at below face value.