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Should You Be Concerned About Rising Interest Rates?

Posted by Doug Hutchinson | CFA®, Director of Research and Trading

April 3, 2018

With interest rates spiking unexpectedly in early 2018 and the Fed poised to continue raising interest rates throughout 2018, some bond investors have become very concerned about experiencing negative returns in their bond holdings. While rising rates will have a negative impact on the price return of a bond investment, this impact can be offset by the positive impact of coupon income.

A rising rate environment isn’t necessarily bad for bond investors in the long run because it will lead to higher coupon payments in the future. As interest rates rise, investors will demand higher coupon payments from newly issued bonds. Also, coupon payments from existing bonds can be reinvested in these newer, higher yielding bonds.

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Rising Interest Rates The Fed Bonds

Evaluating the Relationship Between Bond Investments and Rising Interest Rates: Doug’s Quiz Corner

February 16, 2018
What Happens to Bond Investments When Interest Rates Go Up? Consider this scenario: Your friend Bob is concerned about what rising interest rates could do to his bond portfolio. He asks for your assistance in evaluating his bond holdings. In his current bond portfolio, he has the following holdings: $10,000 face value AA rated municipal bond that matures in 3 months and is currently trading slightly below par. $15,000 of a mutual fund that holds investment grade, floating rate bonds. $20,000 of a short-term, investment grade corporate bond ETF which tracks a broad index of hundreds of bonds. $3,000 of a high yield bond ETF that tracks a high yield index of hundreds of bonds. Bob has a long investment horizon ahead of him and he won’t need any of the funds invested in his bond portfolio for many years. To top it off, Bob also has another $100,000 of his portfolio invested in various equity market investments. [+] Read More

Federated Investors 2017 Outlook

January 9, 2017
Stephen Auth, CFA and Chief Investment Officer, Equities, shares his expectations for 2017 including: The effect of the Trump administration and Republican Congress Fiscal stimulus vs. structural reform A new phase for the bull market "Climbing the Wall of Hope" through 2018. A selection is provided below, or you can download the complete commentary as a PDF. [+] Read More

Are Tax Exempt Municipal Bonds Better Than Corporate Bonds? - Doug's Quiz Corner

September 13, 2016
Quizmaster, Doug Hutchinson, presents his quiz for the month. Here, Doug considers whether tax-exempt municipal bonds are a better investment than corporate bonds. Consider this Scenario: Your friend Ricky is considering purchasing a bond and is deciding between a taxable corporate bond and a tax-exempt municipal bond. The taxable bond has a yield to maturity of 4.10% and the tax-exempt municipal bond has a yield to maturity of 3%. Assume both bonds have a similar credit quality and a similar maturity. Assume that Ricky has a federal tax rate of 25% and a state tax rate of 5% and assume that the interest from the tax exempt municipal bond is exempt from both federal and state income tax. Which bond will give Ricky the higher after tax yield to maturity?? [+] Read More