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If you can survive on the interest, the price of the underlying bond itself is not as important.
by tcbawo 11y ago
If you can survive on the interest, the price of the underlying bond itself is not as important.
- jgalt212 11y agoExcept that doesn't work so well right now b/c most sovereign bond yields are negative, or very close to negative, on an inflation adjusted basis.
- evanpw 11y agoThis is both true and false: a fall in the price of a bond reflects opportunity costs. An example: you buy a brand-new MacBook Pro (bond) today for $1800. The next day, Apple cuts the price of the exact same model by 30% to $1260 (interest rates rise, bond prices falls). On the one hand, you have exactly the same computer you had on the previous day (same stream of interest payments), so you could say that you haven't lost anything. On the other hand, if you'd waited a day, you could have gotten exactly the same thing for $540 less, so you could say that you're out that amount. And if you fall on hard times and need to sell the computer, no one will be willing to pay you $1800 for it, since they can buy it from Apple for much less, so in that case the opportunity cost becomes an explicit cost.
- walshemj 11y agoErr no you will have lost 30% or so of the value of the bond portion of your pension fund/ investments. BTW the last bond crash was around 30% loss in a very short period.
- evanpw 11y agoI'm not sure what part of my comment you're disagreeing with; I agree that bond prices can fall significantly in a short period of time. I was mostly disagreeing with the statement that such a drop doesn't matter if you don't sell.
- walshemj 11y agoNot if your going to have buy an annuity. And remember most bonds are well over par at the moment