When investing in bonds, some basic concepts of bond risk usually escape investors. Most understand the risks associated with inventory. If you invest in an action and its price goes up, you earn money, if it drops you lose. But the bond risk has many different components. One of these risks is the way the interest rate and maturity affect the price of bonds.
The due date of a bond is the date on which the principal amount is repaid and the issuing organization makes you your investment. You can buy bonds with maturities as short as a week or as long as one hundred years. It is clear that the term [s] you choose must be aligned with your investment objectives.
In general, most investors should consider bonds with a maturity of 20 years or less. Many investors are staggering the maturities of different bonds in a portfolio to create a "ladder structure". This creates a mix of short- and long-term maturities and interest rates.
If you hold a bond until the end of the year, assuming that the bond you own is not in default, you will get back your initial investment. Enter sometimesSince interest rates fluctuate, the price of the bond will also fluctuate. This means that the price of your bond will go up and down.
If interest rates rise, the present value of a bond will drop. If interest rates fall, the current value should increase. The relationship between interest rates and bond prices is opposite. The price of a short-term bond will fluctuate less than that of a long-term bond, because the shorter its maturity, the more you will recover your capital and the sooner you can reinvest at current rates. The shorter delay reduces the risk of something going wrong. Since short-term bonds have lower price volatility risks than long-term bonds, the interest rate should be lower for shorter maturities. Shorter maturity, less risk, less interest. Longer term, more risk, higher interest rate.
How long should you buy if you think the rates are going up? The answer, the shorter term. The value of short-term bonds is more stable in a context of rising interest rates. As rates rise, your portfolio will be more stable and your maturing bonds will allow you to reinvest at the currently higher rate.