UnThreaded | Threaded | Whole Thread (9) | Ignore Thread Prev | Next
Author: jbking Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35363  
Subject: Re: Why should bond prices drop? Date: 1/9/2005 11:33 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 3
Greetings Travis,

I'm relatively new to understanding bonds, but I understand that as rates go up, prices for outstanding bonds should go down, in general. It seems almost assured that as the fed raises interest rates, government bonds should go down in price, in general.

As long as the bond is outstanding, yes. There is something to be said for the prices of a bond coming back to whole as the bond nears maturity in the case of plain Treasuries, TIPS being a special case where the face value may increase over time to reflect inflation. So, if you buy a Treasury on TreasuryDirect for $1,000 then I think you'll end up getting back that $1,000 while in between the value of the bond may dip as rates rise it will be made up for as the bond approaches maturity.

However, given that we expect the fed to raise interest rates, and that the fed is doing it in a fairly predictable manner, shouldn't the bond price remain the same?

No since the old bond has a coupon rate of x% and the new bond has a rate of y% and y>x then the old bond would have to sell for less to be the same rate as new issues.

One usually true principle in stocks is that if everyone knows the price will go down (or up) tomorrow, then it will go down (or up) today.

So Microsoft should have sunk before its big dividend since it was going to go down then? Really? Or am I missing part of the principle here since dividend paying securities would be most like bonds and they do have a drop when they go ex-dividend.

Why shouldn't that be true with bonds?

I'm not sure I understand the principle entirely but some bond prices are changed in anticipation of rate hikes.

Wouldn't reasonably expected interest rate increases already be priced into bonds?

Ah but there are different rates and different risks that can account for this bond yielding x% and that bond yielding y% sometimes so there is more than just what the Fed does, particularly if one is looking at corporate bonds as issues like how easily the company can repay the debt can be a factor, e.g. how many are cents on the dollar are airline bonds going for these days?

Or is there something I'm missing.

I think it is worth noting the rates that the Fed does control which are short-term bank loan rates not necessarily what a 6 month T-bill will yield. Secondly, for bonds longer than a couple years, inflation could well be something to take into account as there is the real return on a bond compared to the nominal return, e.g. will $100 now be the same $100 in 2010? Likely not.

Just a couple of answers to your questions,
JB
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (9) | Ignore Thread Prev | Next

Announcements

Post of the Day:
Value Hounds

Ubiquiti Analysis
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement