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Notes From an Actuary

By Jonathan Wallentine

 

Are Bonds "Risky" in a Rising Interest Rate Environment?

 

Given the current low interest rate environment we’ve found ourselves in since the financial crisis, I can’t count the number of times over the last few years that I’ve heard investors say, “and with that interest rate risk…” After hearing this over and over and giving the same explanation, I’ve decided to put my explanations and thoughts into print.

 

For simplicity’s sake, I won’t go too deep by discussing shape, market, credit risk, etc. I will simply illustrate my points using the term “bond” in a generic sense. My single most important message is that if “Interest Rate Risk” is defined by loss of principle, then it doesn’t exist if a bond is held to maturity. Lower bond prices simply reflect the lost opportunity cost of investing at a higher interest rate.

 

What is “Interest Rate Risk”?

 

The simplest form of “interest rate risk” is ... Log in or subscribe to continue reading.


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