13th letters to friends of Brunei (Bond Price)

Assuming you want to invest in bond for capital (& coupon) gains, with no intention to hold it to maturity. Below are some interesting facts:

1. Bond price and yield (& interest rate) are inversely related.

During economic crisis, when Fed Reserve raise the interest rate, the bond price will fall, and the yield will rise. Therefore, when some smart journalist writes about "bond yield increase .....", it (usually) is not good news.

2. Bonds with longer years to maturity is more volatile than short bonds.

Therefore, if a decrease in interest rate is expected, consider buying into long bond. On the other hand, if interest rate is expected to rise, sell long bond and buy short bond.

3. Low coupon bonds are more volatile than high coupon bonds

When decrease in interest rate is expected, consider buying into low coupon bond. If interest rate is expected to rise, sell low coupon bond and buy into high coupon bond.

4. When yield change, the size of a price increase is greater than the size of price decrease.

A 1% decrease in yield, you will enjoy gain in bond price, and this gain is more than the loss you would suffer from a 1% increase in yields.

Above facts are from Burton Malkiel's "bond price theorems".

First time reader will get confuse with the yield & bond price changes. This is normal. It took me many years of constant reading to understand the subject. Consult a qualified financial advisor if you want to invest in bonds.