The Relationship Between Bonds And Interest Rates

​The prices of bonds tend to fall as interest rates rise. Bond prices tend to decline as interest rates rise (and likewise when they fall). There have been questions about the inverse connection between changes in interest rates and changes in bond prices. It starts to make sense.

Bond Prices And Yield
Like any other type of investment, bond buyers seek the highest potential yield. In most cases, this requires them to keep an eye on interest rate fluctuations.

Understanding why bond values progress the reverse of interest rates may be done by looking at zero-coupon bonds that don't pay the interest but are valued based on the difference between purchase cost and the par value payable when they mature.

What is a Zero-Coupon Bond?
If you own a zero-coupon bond, you will receive the face value of the bond when it matures. Therefore, when the maturity date of these debt securities draws near, their value rises.

Investors should be aware of the special tax considerations related to zero-coupon bonds.  There is no regular interest payment made in zero-coupon bonds, but the yearly return is still considered income and taxed as interest. An increase in the bond's value due to its approaching maturity is treated as ordinary income rather than capital gain for tax purposes.

In other words, even though the investor won't get paid until the bond matures, they still have to pay taxes on these bonds every year. In the eyes of some financiers, this could be an unnecessary burden. While these tax implications cannot be entirely avoided, they can be mitigated.

Conclusion
The remaining secondary market bonds must regularly adjust their yields and prices to meet the current rate. As yields fall, investors can reap the benefits of both capital appreciation and yield. Bonds and funds can lose value if interest rates rise above their face value.

At Appletree Insurance, we aim to provide comprehensive insurance policies that make your life easier. We want to help you get insurance that fits your needs. You can get more information about our products and services by calling our agency at (603) 881-9900. Get your free quote today by CLICKING HERE. Topics and coverage discussed in this article are not guaranteed, consult with your agents to determine what your policy does and does not cover. We are more than happy to help!