Investor BulletIn Interest Rate Risk — When Interest Rates Go Up .
Investor BulletInInterest rate risk —When Interest rates Go up,Prices of Fixed-rate Bonds FallThe SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to make investors aware that marketinterest rates and bond prices move in opposite directions—for example, when market interest rates go up, prices of fixed-ratebonds fall.You may have noticed articles in the media about investors “chasing yield,” the so-called “bond bubble,” or predictionsabout declines in bond prices. some of these warnings about a drop in bond prices relate to the potential for a rise ininterest rates. Interest rate risk is common to all bonds, particularly bonds with a fixed rate coupon, even u.s. treasurybonds. (Many bonds pay a fixed rate of interest throughout their term; interest payments are called coupon payments,and the interest rate is called the coupon rate.)the purpose of this Investor Bulletin is to provide investors with a better understanding of the relationship amongmarket interest rates, bond prices, and yield to maturity of treasury bonds, in particular, although many of theconcepts discussed below generally apply to other types of bonds as well. this Investor Bulletin is a companion piece toour Investor Bulletins on Corporate Bonds, High-Yield Bonds, and Municipal Bonds. For a basic explanation of howbonds operate and their terminology, please see our Investor Bulletin on Corporate Bonds.The Effect of Market Interest Rates on Bond Prices and YieldA fundamental principle of bond investing is that market interest rates and bond prices generally move in oppositedirections. When market interest rates rise, prices of fixed-rate bonds fall. this phenomenon is known as interestrate risk.Investor Assistance (800) 732-0330www.investor.gov
A seesaw, such as the one pictured below, can help you visualize the relationship between market interest rates andbond prices. Imagine that one end of the seesaw represents the market interest rate and the other end represents theprice of a fixed-rate bond.Market Interest Rates and Prices of Fixed-Rate Bonds Move in Opposite DirectionsHigher market interest rates lower fixed-rate bond pricesLower market interest rates higher fixed-rate bond pricesA bond’s yield to maturity shows how much an investor’s money will earn if the bond is held until it matures. Forexample, as the table below illustrates, let’s say a treasury bond offers a 3% coupon rate, and a year later market interestrates fall to 2%. The bond will still pay a 3% coupon rate, making it more valuable than new bonds paying just a 2%coupon rate. If you sell the 3% bond before it matures, you will probably find that its price is higher than it was a yearago. Along with the rise in price, however, the yield to maturity of the bond will go down for anyone who buys thebond at the new higher price.EXAMPLE 1: If Market Interest Rates Decrease by One PercentFinancial TermMarket Interest RateCoupon Rate (semi-annual payments)Face ValueMaturityPriceYield to MaturityToday3%3% 1,00010 years 1,0003%One Year Later 2%3% 1,0009 years remaining 1,0822%Lower market interest rates higher fixed-rate bond prices lower fixed-rate bond yieldsInvestor Assistance (800) 732-0330www.investor.gov2
now suppose market interest rates rise from 3% to 4%, as the table below illustrates. If you sell the 3% bond, it willbe competing with new treasury bonds that offer a 4% coupon rate. The price of the 3% bond may be more likelyto fall. The yield to maturity, however, will rise as the price falls.EXAMPLE 2: If Market Interest Rates Increase by One PercentFinancial TermMarket Interest RateCoupon Rate (semi-annual payments)Face ValueMaturityPriceYield to MaturityToday3%3% 1,00010 years 1,0003%One Year Later 4%3% 1,0009 years remaining 9254%Higher market interest rates lower fixed-rate bond prices higher fixed-rate bond yieldsFor a more detailed explanation of yield to maturity, including additional examples, please see our Investor Bulletinon Corporate Bonds.The Effect of Coupon Rates on Interest Rate RiskInterest rate risk is common to all bonds, even u.s. treasury bonds. A bond’s maturity and coupon rate generallyaffect how much its price will change as a result of changes in market interest rates.If two bonds offer different coupon rates while all of their other characteristics (e.g., maturity and credit quality) are thesame, the bond with the lower coupon rate generally will experience a greater decrease in value as market interest ratesrise. Bonds offering lower coupon rates generally will have higher interest rate risk than similar bonds that offer highercoupon rates.Lower fixed-rate bond coupon rates higher interest rate riskHigher fixed-rate bond coupon rates lower interest rate riskFor example, imagine one bond that has a coupon rate of 2% while another bond has a coupon rate of 4%. All otherfeatures of the two bonds—when they mature, their level of credit risk, and so on—are the same. If market interestrates rise, then the price of the bond with the 2% coupon rate will fall more than that of the bond with the 4%coupon rate.remember:Lower market interest rates higher fixed-rate bond prices lower fixed-rate bond yields higher interest rate risk to rising market interest ratesInvestor Assistance (800) 732-0330www.investor.gov3
Because of this relationship, it is particularly important for investors to consider interest rate risk when theypurchase bonds in a low-interest rate environment.The Effect of Maturity on Interest Rate Risk and Coupon RatesA bond’s maturity is the specific date in the future at which the face value of the bond will be repaid to the investor.A bond may mature in a few months or in a few years. Maturity can also affect interest rate risk. The longer the bond’smaturity, the greater the risk that the bond’s value could be impacted by changing interest rates prior to maturity,which may have a negative effect on the price of the bond. Therefore, bonds with longer maturities generally havehigher interest rate risk than similar bonds with shorter maturities.Longer maturity higher interest rate riskShorter maturity lower interest rate riskto compensate investors for this interest rate risk, long-term bonds generally offer higher coupon rates than short-termbonds of the same credit quality.Longer maturity higher interest rate risk higher coupon rateShorter maturity lower interest rate risk lower coupon rateIf you intend to hold a bond to maturity, the day-to-day fluctuations in the bond’s price may not be as important toyou. The bond’s price may change, but you will be paid the stated interest rate, as well as the face value of the bond,upon maturity. on the other hand, instead of holding the bond to maturity, you might be able to sell the bond andreinvest the proceeds into another bond that pays a higher coupon rate.All Bonds are Subject to Interest Rate Risk—Even If the Bonds Are Insuredor Government GuaranteedThe seesaw effect between interest rates and bond prices applies to all bonds, even to those that are insured orguaranteed by the u.s. government. When the u.s. government guarantees a bond, it guarantees that it will makeinterest payments on the bond on time and that it will pay the principal in full when the bond matures. There is amisconception that, if a bond is insured or is a u.s. government obligation, the bond will not lose value. In fact, theU.S. government does not guarantee the market price or value of the bond if you sell the bond before it matures.This is because the market price or value of the bond can change over time based on several factors, including marketinterest rates.Investor Assistance (800) 732-0330www.investor.gov4
Additional InformationnFInrA Investor Alert: Duration—What an Interest rate Hike Could Do to Your Bond PortfolionseC Investor Bulletin: What Are Corporate Bonds?nseC Investor Bulletin: What Are High-Yield Corporate Bonds?nseC Investor Bulletin: Municipal BondsnseC Investor Bulletin: Municipal Bonds: understanding Credit riskThe Office of Investor Education and Advocacy has provided this information as a service to investors.It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning themeaning or application of a particular law or rule, please consult with an attorney who specializes insecurities law.SEC Pub. No. 151 (6/13)
Along with the rise in price, however, the yield to maturity of the bond will go down for anyone who buys the bond at the new higher price. EXAMPLE 1: If Market Interest Rates Decrease by One Percent. Financial Term. Today. One Year Later . Market Interest Rate. 3%. 2%. Coupon Rate (semi-annual payments) 3%. 3%. Face Value. 1,000. 1,000 .
interest rate. An interest rate future is actively used to hedge against future interest rate movement, i.e., so-called interest rate market risk. Due to the varying feature of the underlying interest rates, the way to calculate the price and to quote the interest rate future varies a lot.
changes on the exchange rate. However, changes on exchange rate cause changes in the local interest rate while changes on the foreign interest rates do not cause changes in the local interest rate. In addition, changes on both the exchange rate and foreign interest rate jointly do cause changes on the local interest rate. Finally changes on
while, the difference between the ex ante real interest rate—the nominal interest rate minus expected infla-tion—and the equilibrium real interest rate is defined as the real interest rate gap. In the new Keynesian model, the real interest rate (RIR hereafter) gap is central to the determination of output and inflation.
Accenture Investor & Analyst Conference 1 April 25, 2018 Accenture . Investor & Analyst Conference . April 25, 2018. New York . ANGIE PARK – Managing Director, Head of Investor Relations. Good morning. I’m Angie Park, Managing Director, Head of Investor Relations and it is my
G. How Investor Relations Has Been Most Helpful to Board of Directors 21 H. How CEOs and Investor Relations Officers Gauge Success of Investor Relations and Investor Relations Incentive Compensation 22 I. Key Components of Effective Investor Relations Programs 23 J. Executives Interviewed 26 About Capital Markets Board 29
The intertwined aims of investor protection and the promotion of investor confidence in the integrity of securities markets are at the heart of IOSCO's objectives. 2. These aims, to varying degrees, are also the objectives of many IOSCO members. Investor education is a key strategy for enhancing investor protection. 3, promoting investor
3 A Functional Time Series Approach 16 . interest rate at which payments are made based on a notional amount. The price of an interest rate derivative depends on the level of the interest rate and its expected change in the future. To price an interest rate derivative, a common approach is to de ne the future evolution of the interest rates .
Mary plans to take Colin to see the secret garden. Mary’s visits make Colin feel a lot better. Martha’s brother, Dickon, visits Colin one day with Mary and brings lots of tame animals with him. Colin is delighted. Mary and Dickon take Colin secretly into the garden. Colin realises it is his mother’s garden, and says he will come every day. Colin spends a lot of time in the garden with .
