Why Bond Prices Go Up and Down
Step 2: Can I Protect Myself Against Interest Rate Fluctuations?
What can you do to protect your money against interest rate fluctuations?
The best protection is to buy bonds with maturities that are either short (under one year) or short-intermediate (between two and seven years).
While all bonds are subject to interest rate risk, that risk is correlated to maturity length. As maturity length increases, so do potential price fluctuations. Conversely, the shorter the maturity of the bond you buy, the lower the risk of price fluctuations as a result of changes in interest rate levels.
To illustrate, let's look at Table 1. This table shows what would happen to the price of a bond selling at par ($1,000), with a 7% coupon, for several different maturities, under three different scenarios:
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