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Don’t Make Me Say I Told You So 73

interest rate available on that same type of bond rises to 7%.
Remember, if you hold your bonds until maturity, you will

receive your full principal back.

Conversely, if you own a bond paying 6%, and interest rates
fall to a point where a new bond of the same type and maturity
pays 5%, the value of your 6% bond will rise. For investors

looking for income, a bond that pays 6% is worth more than

a bond paying 5%. If you wanted to sell your bond that pays
6%, you could command a premium that brings the yield in line
with the current 5% available in the bond market.

As an example, a $100,000 30-year bond with a 6% coupon
rate would rise in value to approximately $115,500 if the current

interest rate available on that same type of bond falls to 5%.

Credit Risk – There is the risk that a borrower, the issuer of the
bond, will be unable to make interest or principal payments

when they are due and therefore default. Credit risk may also be
referred to as “default risk.” Credit risk is minimal for mortgage-

backed securities issued by government agencies. These
“agency” securities are issued by Ginnie Mae, Fannie Mae, or

Freddie Mac. Most asset- backed securities usually carry bond
insurance that guarantees payments of interest and principal

to investors.

Chapter 3: You Must Have Growth In Your Portfolio