Friday 31 July 2009

Fluctuations in Bond Prices

Long-term bond market prices and interest rates changes

  1. The investor should be aware that even though safety of its principal and interest may be unquestioned, a long-term bond could vary widely in market price in response to changes in interest rates.
  2. Because of their inverse relationship the low yields correspond to the high prices and vice versa.
  3. Note that bond prices do not fluctuate in the same (inverse) proportion as the calculated yields, because their fixed maturity value of 100% exerts a moderating influence.
  4. However, for very long maturities, prices and yields change at close to the same rate.

Ref: Intelligent Investor by Benjamin Graham

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