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Price and Interest Rate

11/8/2013

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Many people don't realize that there are actually two components to a bond, price and the interest rate. The general public thinks that bonds are safe and that you can't lose value. This is a myth!

When you buy a bond you must pay a price and that component is constantly changing just like the stock market. For instance, if you buy a 10 year bond at 3% and the bond market then falls to 2%. If you want to sell that bond you would be crazy to not charge a premium for it. Why? Because you're currently getting an extra 1% vs the market.

Always remember this: prices of bonds move inversely to interest rates. Interest rates go up, prices for the bonds go down. This is an important point that is lost to many finance and economics majors.

Note: if you hold the bond until its maturity date, then it will redeem at par value, not what you paid for it. This is why people think that you can't lose money in bonds.

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    This website was created due to the atrociously misguided financial advice that I've heard over the decades.  Financial freedom is not intellectually strenuous, but it takes discipline. 

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