Loading ...Who wants to buy an older lower rate bond when the new bonds have higher rates?
The Diff is in what u pay for the Bond…..that makes up for the difference in rates…..Say u have a $ 1 million bond paying 5 %, but rates are now 10 % and 5 yrs left to run …..the annual 5% Loss would be made up in how much u pay in cash….u would pay less $ 750,000 tks to compounding on the capital amount …. ((1 million* 5 %) * 5 ) = $250,000. So u get back the $ 1 million plus 5 yrs at 5 % = $ 250,000 = $ 1,250,000….but u only paid out $ 750,000 which = $ 500,000, which is 10 % on $ 1 million over 5 yrs.
It should not be a problem…..the problem comes when rates rise, then if u sell early before the maturity date, u get a capital loss…see above and therefore buyers run away from bear mkts….worse than in any other kind of mkt, because of that risk…if u run to maturity u get no capital hit….but u get an opportunity hit…u lost interest .