Archive for the ‘Fixed-Income Securities’ Category

The Appeal of Bonds

Monday, July 24th, 2017

“We must all suffer one of two things: the pain of discipline or the pain of regret or disappointment.”

                   Jim Rhon, entrepreneur/motivational speaker

As fixed-income investments, bonds are all about income. Cash flow will be consistent, based on the bond’s coupon, until the bond matures. Each day that passes, the bondholder is accruing income and shortening the bond’s maturity, even though those changes aren’t reflected in the value of their account.

The risk in bonds is in their price, which fluctuates. Bond prices are affected by many factors, including interest rates and inflation. When interest rates increase, yields increase, too, and bond prices generally move in the opposite direction.

With interest rates rising, many investors are concerned about the impact that will have on the price of their bonds, but the Federal Reserve Board has already said that rates will remain below normal levels for years to come. It’s doubtful, for example, that the yield for a 10-year Treasury will exceed 3% anytime soon.

In addition, inflation will likely remain low for some time. The U.S. inflation rate has dropped from 2.7% in February to just 1.6% in June.

And while changes in price matter, most of a bond’s return comes from its coupon. Recognize that it’s all about cash flow and you’ll understand why bonds are a safer investment than stocks. (more…)

Take Advantage of Rising Interest Rates by Understanding Duration

Friday, June 7th, 2013

Recently, there has been a lot of news about rising interest rates ending the bond rally.

Investors who have a significant percentage of their investments in bonds may be getting nervous, but there’s a simple strategy for protecting principal and taking advantage of increasing interest rates.

Bonds generally make up a significant portion of a diversified portfolio, so if the bond rally is over, it is important to be positioned in bonds that will maintain their value in a rising interest rate environment.

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