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Financial Planning / Foolish 401(k)s
|Subject: Re: Bond Funds||Date: 9/28/2013 12:24 AM|
|Author: W401K||Number: 25156 of 25275|
Bonds have been on a 30 year bull market. As interest rates fall, bond prices tend to rise and vice versa. We have seen rates go from 13% and higher basically down to zero. The question is how much upside is there in bonds when rates are this low.
The question is when and how quickly do you expect rates to rise. As rates rise, bond prices tend to fall. Think of it this way, If you own a Bond that pays 5% interest, and then interest rates go to 7%, no one will want to buy your bond that only pays 5% because they can get a new one on the market that pays 7%. So, in order to make your Bond attractive, you have to discount the price to make it more appealing with the lower interest rate.
Not all Bonds are subject to this, so the question may be, What types of Bonds should I own.
Those with lower credit quality tend not be as sensitive to interest rate moves
Bonds with Shorter term maturities will not react as much to rate changes
International Bonds may be attractive because interest rates are not as low in other countries as they are here in the US.
Senior Floating Rate Notes, or Bank Loans, adjust their rates with interest rate changes and therefore tend not to be impacted by rate changes.
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