Can you lose money on bonds when interest rates rise?

Yes, if you sell a bond after market yields have risen, its price may be below what you paid. A holder who keeps a standard bond to maturity and the issuer pays as promised receives the stated coupons and principal, but still may have earned less than newer bonds offered after rates rose.

Do bond prices fall when the Fed raises rates?

They often fall, especially at shorter maturities, because the Fed’s policy rate influences the return available on cash and short-term debt. Longer-term bond prices depend on more than the current policy rate, including inflation expectations, growth expectations and the market’s view of future rates.

Why are long-term bonds more sensitive to rising yields?

Long-term bonds have more of their cash flows far in the future, so those payments are discounted for more years. A higher yield therefore reduces their present value more sharply than it reduces the value of a short-term bond with similar credit quality.

Are higher bond yields good or bad?

Higher yields can be good for new buyers because they can earn more income on bonds purchased at the new rate. They are generally negative for existing bond prices, and they can raise borrowing costs for governments, companies and households.

Amanda Ross | Treasury

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