Client Profile April 2018

Phil owns bonds and shares of bond mutual funds, but worries about how rising interest rates will affect his income now and in the future. He wonders if he should hold on to these investments or trade them for higher-earning bonds and mutual fund shares.

After years of paltry returns, interest-sensitive investments are seeing the beginning of a bump in rates. However, rising interest rates can affect Phil’s bond investments in ways he might not anticipate.

When interest rates rise, the yields on new bond issues typically rise with them. When newer issues pay higher interest rates, you typically have to accept a lower yield than first promised for older bonds sold before maturity because their rates are no longer as attractive. If, however, you buy a bond and hold it to maturity, you will receive the yield promised when you bought the investment, regardless of current interest rates.

Bond mutual funds offer no such promises because fund managers trade regularly and often sell holdings before maturity. Thus, if you own bond fund shares, you could earn more or less than the going rate for bonds.

Client Profile is based on a hypothetical situation. The solutions we discuss may or may not be appropriate for you.