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How Interest Rate Changes Affect the Price of Bonds

Whether the interest rate movements are caused by Federal Reserve actions, economic conditions or inflation fears, the impact on the bond investor is the same: Rising interest rates reduce existing bond values and falling interest rates increase existing bond values.

Seems simple enough.

But how will your bond investments be affected by changes in interest rates?

Since bonds differ by maturity, coupon rate, type of issuer and other factors, figuring out how your bond or bond portfolio will be affected by interest rate changes can be complex. Fortunately, you don't need a math degree to understand the basic concepts. Here are some simple guidelines for judging the price volatility of your bonds.

What Affects Bond Price Volatility

The price that a bond sells for in the market today is the sum of all future cash flows, discounted in value because they are not available today. A dollar tomorrow is worth less to you than a dollar today. The discount rate used is the rate of interest prevailing in the...

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Life Cycle Funds

Life cycle funds are marketed as a maintenance-free way for individuals to invest for retirement. They were created under the assumption that many individuals needed a one-stop investment vehicle that properly rebalances their portfolios over their investment lives, as their investment needs change. Typically, in an individual’s younger years, riskier but higher-return potential assets should be emphasized, but as the individual approaches retirement, the percentage commitment to these types...

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