Interest Rate Risk

Today we are going to discuss Interest Rate Risk.  The interest rate risk associated with our investments in stocks and bonds is a result of fluctuations in the overall interest rates caused by the change in the supply of or demand for money.  Interest rates seldom remain the same for long periods.  As they rise and fall, they affect the value of fixed investments like bonds.  As interest rates increase the value of bonds fall; when interest rates fall, the value of bonds increase.

For example, assume that a $1000 corporate bond matures in 20 years and pays 8 percent interest ($80) each year.  If bond interest rates increase to 11 percent on comparable bonds, the value of the 8 percent bond falls because people can buy bonds paying a higher return.  Because of this, the original bond has to be sold for less than $1000 or held until maturity.

 

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