Page 68 - Ready Set Retire

Stephen J. Kelley

they should be called “riskies”). And the values of securities go
up and down with supply and demand.

Here are some troubling facts about bonds. Today there is
about two and one-half times as much money being held in
bonds as there is in equities. That’s a huge number; nearly $100
trillion. That’s trillion, with a “tr”! What would happen to the
economy, and your retirement, if that huge bubble popped?
And how likely is that to happen?

Bond prices fluctuate with interest rates. As interest rates go
up, bond prices go down, and vice versa. Here’s how that
works.

Assume you buy the afore-mentioned $1,000 bond (that’s how
bonds are sold), with a face value of 5%. That means every year
you will get $50 in interest for as long as you hold the bond.
And, if you hold the bond to maturity, and the company is still
in business, you will get your $1,000 back.

Now assume interest rates go up to 10%. What happens to the
value of your bond? Again, if you hold it to maturity, nothing.
You will get your full $1,000 back.

But in the bond market, your bond’s value has gone down by
50%! That’s because no one will pay full price for a bond only
paying 5% in a 10% interest rate environment. Would you? If
brand spankin’ new bonds were being sold with an interest rate
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