I plan to buy several bonds from the original institution and also plan to hold the bond to maturity. I understand the inverse relationship between bond prices and interest rate, but since I plan to buy & hold bond to maturity, should I really be concerned about interest rates?
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The interest rate on your bonds will stay solid as long as that is the type of bond you purchased. Some bonds have step rates or zero coupon rates. However, it sounds like you are buying a regular bond that has a fixed percent with a fixed term. Each day, the market price of the bond fluctuates based on its selling and buying values. As long as you hold it to maturity, none of this matters. The only down side for a bond these days is the solvency of the company. Like Lehman Bros. Their bond holders just received a notice that they will get $600 from a $5K investment. Bonds are a fab investment right now. Best investment is a mid term bond that would be held for five years. You can get some good ones out there with a term of five years with a 7 plus percentage return. Anything over five years, plan to hold them for a while. Eventually interest rates will go up and if you need to sell your bond, you may not get the full value.
No. Your semiannual interest payments will be the same throughout the life of the bond, at maturity you will get your principal back.
You should have some concern. If interest rates are above the coupon rate for the bond, you should demand original issue discount, i.e. pay a price below par value. Also, if you cannot hold the bonds until maturity, higher interest rates will depress their value at the time.
No. If you have a fixed rate bond and hold it to maturity, you’ll get the interest regardless. Where interest rates matter is if you want to sell it: the market value WILL be affected by current rates.
In addition to the factors already alluded to by others, bear in mind the effects of inflation. While the yields of the bonds will not change for you if you hold the bonds to maturity, the purchasing power of those amounts will be affected by the changing cost of living – especially if your plan involves bonds with many years to maturity. (Just a thought that should not be overlooked.)
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