Rowe Price that emerged in the early 1980s was a firm chastened, wiser and much more valuation-conscious, with strong bond and value funds to complement its original growth specialty.
Why he thought a discounted 3% bond was better value than a 5% bond sold at par is unclear.
ECONOMIST: What did early 19th-century literary characters live on?
But with coupons closer to 3.7% today, the same two-point rate increase cuts the bond's value by 28%.
When interest rates start to rise the opposite happens, bond prices lose value.
FORBES: Is Your 529 College Plan Safe? Bond Managers Flash Warning Signals
Muni bond defaults have been below average this year and money value at muni bond defaults has been below average, both in number and in money.
FORBES: Ken Fisher Likes Toys, Semis And More For The Rebound
When interest rates decline, the value of a bond investment rises, and conversely when rates rise, your bonds decline in value.
The whole situation boils down to this: because a nonperforming bond is worth less than 100% of its face value, the Brady bond replaces the defunct debt as a new asset.
The problem is that as interest rates go up, bond prices fall in value.
Declining rates pushed up the value of bond investments, delivering an average 9.3% return for Treasury bond mutual funds.
FORBES: Playing The Big Bond Meltdown Without Getting Burned
The longer-term bond will rise in value over time.
FORBES: One of the Most Profitable Strategies in Bond Investing
Rates are very low right now, but there is an interesting facet to EE bonds: the Treasury guarantees the bond will double in value if held to maturity, which is 20 years.
Bond investors become concerned that the currency will lose its value faster than the interest on the bond will grow.
It is calculated by dividing the annual coupon payment by the par value of the bond.
The fact that early bonds had no fixed maturity date ensured that any change in interest rate was fully reflected in the capital value of the bond.
ECONOMIST: What did early 19th-century literary characters live on?
Are you saying that market investors will be duped into accepting a yield that is less than warranted by the actual riskiness or time value of the bond?
FORBES: Irish Deal Calculations: Alternative Bond Sale Scenario
As its yield falls the value of the bond rises.
FORBES: One of the Most Profitable Strategies in Bond Investing
Obviously, the value of the bond does not rise forever.
FORBES: One of the Most Profitable Strategies in Bond Investing
BASF, banks and insurers also find buybacks attractive, because strong stock and bond markets have boosted the value of their assets and left them with far more capital than regulators require.
When interest rates inevitably rise, the value of those bond holdings may drop faster than the tide at the Bay of Fundy, but for now bonds are attracting those most afraid of getting in over their heads.
So the more growth-oriented client may be invested more heavily in dividend-oriented equities, whereas our more conservative clients may have a mix of bonds in their portfolio, including possibly emerging market bonds, corporate bonds and a variety of different bond instruments where we see value.
Also, mortgages have a duration (a calculation of the time it takes to get paid back) that is a variable, hypothetical duration that varies with prepayment speeds, so a short duration mortgage portfolio is not protection against a sudden increase in interest rates, because if interest rates rise the duration will rise which hurts the value of the bond.
FORBES: A Haven From A Eurozone Crash: Investment Grade Bonds
But for your Uncle Al living in Boca, if he is paying 20% over the value of Treasury bonds at par today to get interest payments of just 1.6%, he is going to get next to nothing in real income after inflation, and he is going to watch the value of his bond plummet once interest rates start rising again, forecast to occur by 2014.
To find value in the municipal bond market, your analysis must constantly keep up with changing circumstances.
Bonds with a maturity of more than ten years account for a third of the value of all outstanding bond issues.
Even then, a bond of 20% of the value of goods must be put up, as insurance against wrongful and malicious impoundment.
And if asset managers turn en masse to bonds with long maturities to match their assets and liabilities more precisely, which is necessary especially for older plans, that will raise bond prices, depress bond yields and increase the present value of assets they must hold again, widening the pensions gap.
All else being equal, a bond with a smaller coupon loses more value when rates rise.
Long-term rates spiked past 13% by 1980, halving the value of some supposedly conservative bond portfolios.
应用推荐