Recent volatility in the stock market has many investors looking for “safety”. Many turn to government bonds. But is now the right time to invest in these notes? Today we’ll talk about the hidden risk in bonds.
Podcast: The Hidden Risk In Bonds
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Key Concept 1: Yield
Key Concept 2: The Relationship Between Yield and Price.
Where is the Hidden Risk In Bonds?
Hold it until it matures
If you hold this note until maturity, you will earn 1.595% over the life of this bond. You’ll collect the interest payments, and most likely the principal. (US Government bonds are backed by the full faith and credit of the United States).
What if Yields Go Up?
The moves can be more extreme if yields increase even more. In this example, we show what happens to the price if yields increase to 2.5% in 6 months.
The price of this bond drops to 98.68, a decrease of 7.5%
If yields move high enough, the price decrease can be more like a stock investment.
Here we show what happens to the price of this note if bond prices move to 3% in one year.
A price decrease of 11% is not what anyone bargains for when they buy a so called “safe” investment.
Lower Return, Higher Risk
Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors He typically works with people who are planning for retirement. Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio. Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.
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