The appeal of investing in high interest rate bonds can be pretty easy to see. These bonds offer a guarantees return on investment, with higher yields than a traditional savings or money market account with almost no risk.
The risk in bond investing comes from the credit rating of the agency or corporation that is issuing the bond, as well as the fluctuations in prices and interest rates. The price an investor is willing to pay for a bond is largely influenced by prevailing interest rates, while the yield is the bond’s yearly return which is affected largely by the price paid for it.
Yields, interest rates, and changing prices will typically not affect a buy-and-hold bond investor, with the exception being if a bond is called. If you are looking to trade bonds with other investors, it is important to understand the factors that can influence the price of a bond.
High Interest Rate Bonds: Price Affecting Factors
What investors are willing to pay for a bond is its price, which is quoted as a percentage of their face value. If you were to buy and sell corporate high interest rate bonds you would need to consider the price of the bond as this greatly affect your return on investment.
Newly issued bonds usually offer higher yields when prevailing interest rates rise in order to keep pace. An existing bond becomes less competitive due to lower coupon rates. This is in light of the fact that investors are less likely to purchase an existing bond that offers a lower coupon rate except if they can get it for a lower price.
This means that higher interest rates mean a lower price for an existing bond. On the other hand, when there is a fall in interest rates, the coupon rates of existing bonds become more attractive, resulting in an increase in price.
High Interest Rate Bonds: Interest Rates And Inflation
Interest rates and inflation have the same affect on the price of bonds. When inflation rates rise, bond prices tend to fall, due to the fact that the bond may be paying out insufficient interest to stay ahead of inflation. Keep in mind that the coupon rate is usually unchanged over the life of the bond.
If bonds have a longer maturity rate they may be high interest rate bonds in order to attract investors who may fear the cost of inflation on their bond investment. Inflation can pose a serious risk to your realized gains, and one reason investors do not always like long-term bonds.
Investors may also be attracted to a higher interest rate if they are going to tie up their capital for an extended period of time. This means an investor is not free to use that capital for other more profitable investments, so a higher yield will be more appealing for investors.
Another factor in the price investors are willing to pay is the financial health of the bond issuer. An economically strong bond issuer will be able to pay the interest on the bond as well as pay it off at maturity. If there are doubts concerning the issuers ability to pay, or if the firm encounters financial problems, causing the bond’s price to fall.
Carefully consider the risks and benefits involved in investing in high interest rate bonds, and consult with your broker, such as the bond specialists at ETrade, to find out how these types of securities can work for you.
You may also like:
- How Do I Redeem Municipal Bonds To Maximize Gains?
- How To Invest In Municipal Bonds For Steady Gains
- How To Buy 30 Year Treasury Bonds
- Why Are Bonds Less Risky To Buy Than Other Types Of Securities?
- How To Buy Zero Coupon Bonds
- When Is The Time To Sell US Savings Bonds?
- How Do I Buy I Bonds To Profit Over The Long-Term?
- How Much Does It Cost To Buy US Savings Bonds?