Home  |  Personal Finance  |  Investing  | 

Understanding U.S. and Foreign Bonds

Why do bond prices fluctuate?

To properly view this site, javascript must be enabled and Flash version 9 or higher must be installed.
Get the latest Flash player
David John Marotta
President, Marotta Wealth Management, Inc., Marotta Wealth Management, Inc.
http://www.emarotta.com  
434-244-0000

David John Marotta is the President of Marotta Wealth Management, a fee-only financial planning and asset management firm in Charlottesville, Virginia. He is an oft-quoted writer and speaker on financial matters and his weekly financial column can be found at www.eMarotta.com

Why do bond prices fluctuate?

 

This expert: 223,661 views

This series: 10,664 views

Download to Mobile Device
Tags:

Bonds

,

Finances

,

Financial planning

,

Money

,

Investing

,

Investment

Comments:

0 (Read Comments) (Add Comment)

Print

Transcripts

Host: Why do bond prices fluctuate?

David Marotta: Bond prices fluctuate based upon interest rate movements. So imagine you have a bond that's paying 8% interest and its a 20-year bond. So for 20 years its going to be paying 8% interest, and you hold the bond for 10 years and its still paying 8% interest. Now, its a 10-year bond that's paying 8% interest. But in the meantime, interest rates have moved. Imagine the interest rates are now paying 9%. So new bonds -- you can get a 10-year bond at 9%, you have this 10-year bond that's is only paying 8%. If you go to try to sell your bond, they are not going to give you the face value for it, so they are not going to -- because they can buy a face value bond at a higher interest rate. So what they will do is, if you have a $10,000 bond, they will lower the price of the bond until your bond is effectively paying 9% interest over the entire duration and then they will buy the bond at that price because that's is the going rates for bonds. Similarly, if you have an 8% bond and you held it for 10 years but now interest rates have dropped and you can only get a 10-year bond at only 7% interest, your 8% interest bond looks very attractive and people will pay you more for it to make the effective duration or yield on your bond 7% interest. So, bond prices will always fluctuate with whatever the current rate is and existing bonds, they will either pay less for them or more for them depending upon where they are in relation to other interest rates.

Other Videos

  • How can I learn more about financial basics?

    How can I learn more about financial basics?

    In this video, Vikki Frank, Kandance Beamon, and Linda Stroman, financial education providers describe several key areas to address regarding debt reduction and elimination. This video is designed to deliver basic financial information to assist individuals and families to be able to identify goals and process strategies for their specific financial needs. The topics included in this video cover are: self-evaluation of debt load, budgeting strategies, understanding the effects on your credit and scores, why savings is important, how to develop a debt elimination plan, and the importance of financial education and how financial counseling may be useful.
  • What is a mutual fund?

    What is a mutual fund?

  • Why do all stock prices tend to move in the same direction?

    Why do all stock prices tend to move in the same ...

  • What is a business plan and why is it needed to start a business?

    What is a business plan and why is it needed to start ...

  • Tax Return

    Tax Return

    This video series will discuss tax return preparation. It gives basic information on preparing an individual income tax return, Form 1040 and the basic schedules. This video is designed for those individuals who want to undertake the preparation of their tax return. There are tips and pointers for those who have attempted this feat in prior years.
  • How to Save Money

    How to Save Money

    In this video, financial planning professional and member of the Financial Planning Association®, Tracey Baker, CFP® describes the four important steps to saving money. This video is designed for individuals who are looking for tips to save money. This video series includes an overview of cutting out avoidable expenses, reducing variable spending, planning for lower fixed costs and making hard decisions.