A pretty good article on bonds.
Why will bonds fall in value as rates go up? A question from a man with 40 years in business and 20 years paying attention to investments. It was interesting to go through the process with him.
First you need to notice that a bond is a package of promises. It is not a single unit. The package includes several small promises. To pay interest each year and a big promise to pay the principle at maturity.
Second you need to notice that on the day you buy the bond each promise is worth a different amount. An interest payment two years away is worth less than one due in one year. It is worth less by the interest you could earn by the due date if you had the cash sooner. You pay the sum of the value of all the promises.
As rates change the value of all…
View original post 361 more words