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>They were taking the hit whether they held the bonds or sold them. Incorrect. The opposite is true, in fact. Todays interest rate is irrelevant with regards t

>They were taking the hit whether they held the bonds or sold them. Incorrect. The opposite is true, in fact. Todays interest rate is irrelevant with regards to future cash flows for the bond. Bonds are fixed income, your coupons are set and you get paid what you get paid. The coupons are fixed and when the bond matures, you are paid face value. The only difference that is due to todays interest rates is that your low interest bonds have to fall in value to meet the market clearing interest rate if you are to sell them.

SantalBlush 4y ago
>Todays interest rate is irrelevant with regards to future cash flows for the bond. Correct. >Bonds are fixed income, your coupons are set and you get paid what you get paid. The coupons are fixed and when the bond matures, you are paid face value. Correct. >The only difference that is due to todays interest rates is that your low interest bonds have to fall in value Incorrect. They fall in price compared to the purchase price, not in value. The value was low even if they had held to maturity. If you were forced to sell a bond before maturity, and you decided to repurchase that same bond, you could regain all of those future cash flows that were supposedly worth more according to the prior book value. Now if you repurchased that same bond, what price would you be willing to pay for it? That's right, you would be willing to pay no more than the current market price, because that is what it's actually worth, given those future cash flows that you so value so much. Why would you only want to pay market price? Because those future cash flows aren't very much compared with the yield of other bonds. You're not going to pay the same price for a 2% yield and a 5% yield, because one is clearly better. The 2% yield has less value; it had less value before you sold it, it would've had less value had you held it to maturity. The bond's value is worth roughly the market price, whether you sell it or not. Its current value has exactly nothing to do with what you paid for it.

SantalBlush 4y ago

>Todays interest rate is irrelevant with regards to future cash flows for the bond. Correct. >Bonds are fixed income, your coupons are set and you get paid what you get paid. The coupons are fixed and when the bond matures, you are paid face value. Correct. >The only difference that is due to todays interest rates is that your low interest bonds have to fall in value Incorrect. They fall in price compared to the purchase price, not in value. The value was low even if they had held to maturity. If you were forced to sell a bond before maturity, and you decided to repurchase that same bond, you could regain all of those future cash flows that were supposedly worth more according to the prior book value. Now if you repurchased that same bond, what price would you be willing to pay for it? That's right, you would be willing to pay no more than the current market price, because that is what it's actually worth, given those future cash flows that you so value so much. Why would you only want to pay market price? Because those future cash flows aren't very much compared with the yield of other bonds. You're not going to pay the same price for a 2% yield and a 5% yield, because one is clearly better. The 2% yield has less value; it had less value before you sold it, it would've had less value had you held it to maturity. The bond's value is worth roughly the market price, whether you sell it or not. Its current value has exactly nothing to do with what you paid for it.