How Do Interest Rates Affect Bonds?

Carole: I hope I’m not interrupting anything, but I need relationship advice.

Katherine: I’ll try my best. What’s up?

Carole: Let me clarify: It’s not about me. It’s about the relationship between bonds and interest rates. Think you can help?

Katherine: Well what do you want to know?

When Interest Rates Rise, Bond Prices Fall

Carole: So, when interest rates go up, bond prices go down. Is that a red flag?

Katherine: It depends on how you look at it.

Carole: So rising interest rates aren’t all that scary?

Katherine: Not all the time. Investors can even benefit, if they take the payment they received from bonds they already own and invest that in new bonds that pay a higher interest rate.

What If Interest Rates Go Down?

Carole: But, what if it’s the opposite and interest rates go down? Are bonds still a worthwhile investment?

Katherine: You need to stay focused on yourself. Don’t go chasing interest rates.

Carole: What do you mean by that?

Katherine: You need to look at your portfolio and your goals. Then, you can ask yourself: “Do I need bonds?”

Carole: All right, I guess you’re right. I’ll focus on my relationship with my portfolio first.

Katherine: I’m glad I could help. I’m always here if you need to talk.

Carole: I really appreciate it.

Watch “Why Bear Markets Can Be a Good Time to Invest” for more from Carole Hodorowicz and Katherine Lynch.