Comments on: Why Bonds Tank When Interest Rates Rise – And Why You Need To Understand

By: Carnival of Net Worth #15

Carnival of Net Worth #15 — Tue, 31 Mar 2009 03:32:55 +0000

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By: surveillance camera systems

surveillance camera systems — Mon, 23 Mar 2009 16:39:29 +0000

A great explanation on that side!. Actually, if it analyzed carefully, if an individual decided to loan, he is now expecting for an interest on the loan he actual made, so he would not be able to pay for it as an actual loan he first done. Bonds have it’s per value upon sold. Other companies assigned risk ratings to bonds, therefore some corporation doesn’t know in advance what price are you wiling to take advance payment.

By: Brian

Brian — Mon, 23 Mar 2009 16:37:49 +0000

I think this is interesting and something I definitely didn’t have any idea about before, but I still have a question. Why would I buy your bond for $500,000 if I’m only going to get the $100,000 principal at the end? Unless I get that $5,000 a year in interest for 80 years I think I would come out behind. It would seem that I’m missing something in my understanding.

By: Semi Frugal Guy’s: The Madness of March Roundup! | Semi Frugal Guy

Semi Frugal Guy’s: The Madness of March Roundup! | Semi Frugal Guy — Mon, 23 Mar 2009 15:37:49 +0000

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By: Neal Frankle

Neal Frankle — Mon, 23 Mar 2009 00:10:54 +0000

Thanks for the kind remarks Geared!

By: The Geared Investor

The Geared Investor — Sun, 22 Mar 2009 17:12:15 +0000

Great article!

Bonds are kind of the dark and scary tunnel that most new and small investors won’t go down. This explanation of the inverse relationship between interest and bond earnings is clear and easy to understand for all investors. @Jim Palmer: Thanks for running the numbers to give us a more precise idea of what our investment would become.

Great job!

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Sun, 22 Mar 2009 14:51:43 +0000

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By: Neal Frankle

Neal Frankle — Sun, 22 Mar 2009 00:40:51 +0000

Thanks Divorced Dad.

Nate, the main goal of this is to explain the relationship between bonds and rates. I agree with you. I don’t know what is going to happen to rates but I think my last warning is worth considering.

ABC’s, good point. Clearly, the article only talks about the impact of rates on bond values and there are other considerations. My point was to explain that relationship in a way readers would feel comfortable with. But I agree, other factors will impact values (but all things being equal – rates have the greatest potential to impact values.)

Jim, again, I really appreciate the feedback. Certainly, the maturity date will have a huge impact on the values as well as other factors. You and ABC are 100%. Again, the idea was to answer the question of how rates will impact values. I isolated one variable and did so hypothetically to illustrate. I should have pointed that out and I really thank you for your constructive comments.

By: Jim Palmer

Jim Palmer — Sat, 21 Mar 2009 22:59:29 +0000

Hi there, I don’t usually weigh in on articles and I certainly appreciate the ones that I have read on this website. The reason for my input is that while the inverse relationship between price and yield is correct in this article, in actuality it appears (if I understand the scenario) that it is vastly overstated.

If you buy could buy an ~30yr Treasury today that has a 5% coupon and you can pay par ($100,000) for it, thereby earning a 5% coupon and yield, THEN, one year from now market rates on that part of the yield curve have fallen to 1%, then your bond would be worth (only) $194,000 – not $500,00 as was mentioned in the article. If, one year later, market rates had risen to 10% the bond referenced above would be worth only ~$54,000. So, the up rate scenario was pretty much right. I ran the analysis on a Bloomberg business computer. Just thought you’d want to know.

Again, thanks for all you are doing to educate, encourage, and inform!

By: ABCs of Investing

ABCs of Investing — Sat, 21 Mar 2009 16:38:50 +0000

Interesting – my Monday post on ABC is on the exact same topic!

Your pricing example is a bit off however – it assumes that the interest rates will stay low for the duration of the bond. It also ignores the discount rate of future payments which is a big factor in pricing long term bonds