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72 Don’t Make Me Say I Told You So

Interest rate risk – Bond prices are inversely related to
interest rates, so if interest rates go down, the price of a bond

will increase. If interest rates rise, however, the price of a bond
will decrease.

If interest rates rise... If interest rates fall...
Bond
Rates Prices
Rise Bond Rise
Prices Rates
Fall Fall

Once bonds are issued, they trade in an open market just like
stocks. A bond’s price and yield are the factors that determine

its value. The yield is the annual return the client will receive if
the bond is held to maturity.

Let’s look at why bond prices go up and down. If you own a
bond paying 6%, and interest rates rise to a point where a new

bond of the same type and maturity pays 7%, the value of your
6% bond will drop. For investors looking for income, a bond

that pays 6% is worth less than a bond paying 7%. If you wanted
to sell your bond that pays 6%, you would need to discount the

sale price of your bond to bring the yield in line with the current
7% available in the bond market.

As an example, a $100,000 30-year bond with a 6% coupon
rate would fall in value to approximately $87,500 if the current

Chapter 3: You Must Have Growth In Your Portfolio