Bond values move inversely to interest rates. As interest rates fell from point D to point E, the value of the
bond fund rose by 22% (from point
A to point B). Then as interest rates rose from point E to point F, the
value of the bond fund fell by 18% (from point
B to point C).

Bonds purchased at point
A would have yielded 7%, while gaining 22% from capital appreciation. Bonds
purchased at point
E would have yielded 4.5%, while losing 18% from capital depreciation.
Why do bonds fluctuate in price?
Suppose you pay $10,000 for 10 year bonds yielding 5%. You'll receive $500 per year in interest from
those bonds (5% of $10,000). Further suppose that a year later, the rate for the 10 year Treasury has risen
to 7%. Investors can pay $10,000 for 10 year Treasuries and receive $700 per year in interest (7% of

Why would an investor pay you $10,000 for bonds yielding $500 per year when they can buy bonds paying
$700 per year for $10,000? They won't. Your bonds must be discounted.

Generally, the longer the maturity of your bonds, the more you'll gain or lose as a result of changing long
term interest rates
How do I use this information?
1) Don't focus solely on yield. Assume that the yield for 5 and 10 year bonds is 5% and 5.3% respectively.
You'll receive .3% more from the 10 year bonds. But the 10 year bonds will typically fluctuate more in price
than the 5 year bonds. Is the risk worth it?
2) Diversify your interest bearing investments. Don't be fooled into believing that long term bonds are safe
investments. Their values can rise or fall significantly. Long term bonds have more risk than short term
bonds. Consider CDs and funds that hold medium or short term bonds. Yes, yields may be lower but the
risk will be lower too.
3) Allocate some of your investments to stocks, real estate and debt reduction.
4) If you own a bond fund, ask their customer service representative how much their fund should fluctuate
based on a 1% rise or fall in interest rates. Many funds now offer this service.
5) Talk to your investment advisor before you invest.
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How Will Interest Rates Affect the Value of Your Bond Fund?
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● Bonds lose value as rates rise.
Bonds gain value as rates fall.
Price gains or loses may be triple the interest received.
1997         1998           1999         2000          2001          2002          2003          2004          2005
Long Term Interest Rate
(10 Year Treasury)
Long Term Bond Fund
Long Term Bond Values and Long Term Interest Rates
22% Rise
18% Decline