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If interest rates rise, what will typically happen to bond prices?
- Stay the Same
- No Relationship
- Don't Know
The term “bond” has many definitions, but from an investment perspective it typically refers to a legal agreement between two parties (for instance, a lender and a borrower)...
Government bonds can have varied maturities and payment features. For instance, zero-coupon bonds don't pay interest, but mature at a higher value than the purchase price. Most government bonds pay regular interest and mature on a specific date. U.S. Treasury bills mature within a year, U.S. Treasury notes mature in one to ten years, and U.S. Treasury bonds mature in more than 10 years....
State and local government bonds (often called munis) typically pay interest that is federal and state tax free in the issuing state. This can be attractive to investors in high tax brackets in taxable (non-retirement) accounts...
The question at the start of the chapter was part of the Financial Literacy Quiz. Only 28% of the 2015 participants correctly responded that when interest rates rise, bond prices fall. 33% chose wrong answers and 38% responded they did not know.5 The explanation according to the National Financial Capability Study is as follows.6 “When interest rates rise, bond prices fall. And when interest rates fall, bond prices rise. This is because as interest rates go up, newer bonds come to market paying higher interest yields than older bonds already in the hands of investors, making the older bonds worth less.”
Chapter 14 Notes - The Footnotes in the Book are sequential and for this chapter start at #257 and end at #262.
These notes are provided for those that have purchased the book and would like to access the notes and links directly.
1. Source: "Are Bonds A Better Bet Than Stocks?" Pensions & Investments, June 24, 1996
2. Edward McQuarrie, The First Eighty Years of the US Bond Market: Investor Total Return from 1793, Combining Federal, Municipal, and Corporate Bonds, October 4, 2018 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3260733
3. See Chen Lian, Yueran Ma, Carmen Wang, Low Interest Rates and Risk Taking: Evidence from Individual Investment Decisions, Review of Financial Studies, August 22, 2018 https://ssrn.com/abstract=2809191 http://dx.doi.org/10.2139/ssrn.2809191
4. Moody's Investor Service, US Municipal Bond Defaults and Recoveries, 1970-2015, May 31st, 2016
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