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Like all bonds, corporates tend to rise in value
when interest rates fall, and they fall in value when interest rates rise.
Usually, the longer the maturity, the greater the degree of price
volatility. By holding a bond until maturity, you may be less concerned
about these price fluctuations (which are known as interest-rate risk, or
market risk), because you will receive the par, or face, value of your bond
at maturity.
Some investors are confused by the inverse relationship between bonds and
interest rates?that is, the fact that bonds are worth less when interest
rates rise. But the explanation is essentially straightforward:
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When interest rates rise, new issues come to
market with higher yields than older securities, making those older ones
worth less. Hence, their prices go down.
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When interest rates decline, new bond issues
come to market with lower yields than older securities, making those older,
higher-yielding ones worth more. Hence, their prices go up.
As a result, if you have to sell your bond
before maturity, it may be worth more or less than you paid for it.
Various economic forces affect the level and direction of interest rates in
the economy. Interest rates typically climb when the economy is growing, and
fall during economic downturns. Similarly, rising inflation leads to rising
interest rates (although at some point, higher rates themselves become
contributors to higher inflation), and moderating inflation leads to lower
interest rates. Inflation is one of the most influential forces on interest
rates.
Remarks: Corporate bonds (also called corporates) are
debt obligations, or IOUs, issued by private and public corporations. They
are typically issued in multiples of $1,000 and/or $5,000. Companies use the
funds they raise from selling bonds for a variety of purposes, from building
facilities to purchasing equipment to expanding the business.
When you buy a bond, you are lending money to the corporation that issued
it. The corporation promises to return your money, or principal, on a
specified maturity date. Until that time, it also pays you a stated rate of
interest, usually semiannually. The interest payments you receive from
corporate bonds are taxable. Unlike stocks, bonds do not give you an
ownership interest in the issuing corporation.
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