When interest rates rise, the price of a bond will fall
Posted: Sun Jan 19, 2025 4:25 am
This is because they are usually viewed as low-risk assets. In finance, assets that are very risky – like equities – usually attract a high return. Risks associated with bonds While bonds are often safer than other securities, they come with a number of risks. Some of these risks are: Market or interest rate risk: The price of a bond usually moves in the opposite direction to interest rates.
When interest rates rise, the price of a bond will fall. Therefore, when interest rates rise, and you don’t plan to hold the bonds to maturity, it means that you will see a fall in your returns. This is the biggest risk to any fixed south africa business email list asset investment like bonds. Reinvestment risk: The cash flow derived from a financial security is usually assumed to be reinvested and the income from this is known as interest-on-interest.
A key determinant on its amount is the prevailing interest rates. Therefore, the risk here is that the interest rates at which this cash flow is reinvested will fall. This is a risk opposite to the interest rate risk. Timing or call risk: At times, the issuers of the bonds can call or refinance the bonds before the maturity rate. This is often done when the market interest rates decline below the coupon rate.
When interest rates rise, the price of a bond will fall. Therefore, when interest rates rise, and you don’t plan to hold the bonds to maturity, it means that you will see a fall in your returns. This is the biggest risk to any fixed south africa business email list asset investment like bonds. Reinvestment risk: The cash flow derived from a financial security is usually assumed to be reinvested and the income from this is known as interest-on-interest.
A key determinant on its amount is the prevailing interest rates. Therefore, the risk here is that the interest rates at which this cash flow is reinvested will fall. This is a risk opposite to the interest rate risk. Timing or call risk: At times, the issuers of the bonds can call or refinance the bonds before the maturity rate. This is often done when the market interest rates decline below the coupon rate.