Get insight on bonds and current market interest rates

Bond prices often adjust to keep the bond competitive with current market interest rates. Find out how this works.

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Notes:

  • All investing is subject to risk, including the possible loss of the money you invest. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.
  • Bond funds are subject to the risk that an issuer will fail to make payment on time, and the bond prices will decline because of rising interest rates or negative perceptions of an issue’s ability to make payments.
  • This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.
  • Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor.

© 2017 The Vanguard Group, Inc. All rights reserved.

TRANSCRIPT

 

Emily Farrell: John had asked us, “I want to understand yield, discount, and interest.” All right, so, Bryan, can you walk us through it?

Bryan Lewis: Sure. A simple example of this is, let’s say you have a bond, a thousand-dollar bond. That’s par value, meaning the value you might get at maturity. Let’s say the coupon rate is 5%, so 5% of 1,000 is $50 a year. Now let’s say interest rates start to go up. Instead of 5%, you can now get a bond that’s yielding 6%. So if you’re the owner of that 5% bond, it’s now less attractive because of the, reduced, or the lower interest rate that you have with the coupon rate.

If you go out and try to sell that, because it’s less attractive, the price of that bond will be worth less. So instead of maybe $1,000, it’s worth $900. So the idea is, and you’ll see this with mutual funds as well, is with a bond fund you get hundreds, if not thousands, of bonds. But I think the easiest way to remember the relationship of this is when interest rates start to go up, bond prices will go down. As a result of the price going down, the yield will start to go up over time, so there’s an inverse relationship to keep in mind. But back to my example is if rates go down, instead of going up, but if they go down, you could be selling it at a premium versus a discount. So things to consider.

Important information

All investing is subject to risk, including the possible loss of the money you invest.  There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.

Bond funds are subject to the risk that an issuer will fail to make payment on time, and the bond prices will decline because of rising interest rates or negative perceptions of an issue’s ability to make payments.

This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.

Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor.

© 2017 The Vanguard Group, Inc. All rights reserved.