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When you buy a bond and the interest rate goes up, the nominal value of the debt goes down when the interest rate goes up, while with bank accounts they stay th

When you buy a bond and the interest rate goes up, the nominal value of the debt goes down when the interest rate goes up, while with bank accounts they stay the same. Ex: You buy a $100 bond at %3, then the prime rate goes up %1 so the typical market price of bonds of your class are now %4. Now your bond is worth less than $100 if you were to liquidate it. Big difference.

pushtheenvelope 8y ago
that's a good point. However, in this case, won't it be more like a bond-fund, where the fund essentially has a ladder of bonds that are constantly expiring and getting reinvested (and also investing new investments from retail investors), and so the overall value of the fund may still remain close to $100. I could well be wrong, so please feel free to correct me! Trying to learn.
- woolvalley 8y ago
  Yes bond funds do that to even out interest rate changes kindof, but those fund prices can still go up and down in price as a result of interest rate changes and other market dynamics. If they called this the 'bond fund account' with easy liquidation and buying to make it bank account-ish, then I don't think people would be as upset about this, but it would be a fairly niche financial product.
- my_first_acct 8y ago
  One risk is that the other investors might suddenly decide for some reason (say a sudden wave of panic) to cash out their holdings in the fund. This would force the fund manager to immediately sell some of the bonds, perhaps at an unfavorable price. Bonds (safe ones) eventually pay out at their full value, but their market price fluctuates before maturity, and a sale forced by other investors could stick you with a loss.
- motivated_gear 8y ago
  There is a strong difference between Yield to Maturity and effective yield. Yes, If they hold bonds until they mature, specifically government bonds, there will be no loss in principle. What people seem to be misunderstanding is that a yield curve exists. If they were to go the safe route of short maturities, the interest rates will be must lower than long dated securities. If they reach for yield in longer term securities, they will have to mark to market when interest rates rise (which they most likely will due to the fed signaling that they'll be tightening in 2019). You can't have your cake and eat it too
deleted 8y ago
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pushtheenvelope 8y ago

that's a good point. However, in this case, won't it be more like a bond-fund, where the fund essentially has a ladder of bonds that are constantly expiring and getting reinvested (and also investing new investments from retail investors), and so the overall value of the fund may still remain close to $100. I could well be wrong, so please feel free to correct me! Trying to learn.

woolvalley 8y ago
Yes bond funds do that to even out interest rate changes kindof, but those fund prices can still go up and down in price as a result of interest rate changes and other market dynamics. If they called this the 'bond fund account' with easy liquidation and buying to make it bank account-ish, then I don't think people would be as upset about this, but it would be a fairly niche financial product.
my_first_acct 8y ago
One risk is that the other investors might suddenly decide for some reason (say a sudden wave of panic) to cash out their holdings in the fund. This would force the fund manager to immediately sell some of the bonds, perhaps at an unfavorable price. Bonds (safe ones) eventually pay out at their full value, but their market price fluctuates before maturity, and a sale forced by other investors could stick you with a loss.
motivated_gear 8y ago
There is a strong difference between Yield to Maturity and effective yield. Yes, If they hold bonds until they mature, specifically government bonds, there will be no loss in principle. What people seem to be misunderstanding is that a yield curve exists. If they were to go the safe route of short maturities, the interest rates will be must lower than long dated securities. If they reach for yield in longer term securities, they will have to mark to market when interest rates rise (which they most likely will due to the fed signaling that they'll be tightening in 2019). You can't have your cake and eat it too

deleted 8y ago

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