If you plan to sell a bond before it matures, you’ll need to consider interest rates. In general, when interest rates rise, bond prices fall. When interest rates fall, bond prices rise. Learn more about how interest rates affect bond prices.
When interest rates fall
If interest rates fall and you decide to sell a bond, you may be able to get more for it than you paid.
Example – You invest $5,000 in a 5-year corporate bond. It pays interest at 6%. After 2 years, interest rates drop to 5%, and you decide to sell the bond for $5,138.
This table shows your return on investment:
| Increase in value of bond |
$138 |
|---|
| Interest earned over 2 years |
+ $600 |
|---|
If you don’t sell, you’ll keep getting interest payments. However, if you reinvest that money, you’ll make less interest on it.
When interest rates rise
When rates are up, you’ll likely get less for your bond than you paid for it. In other words, you’ll be selling it at a discount.
Example – You buy a 5-year, $5,000 bond paying 6% interest. After 2 years, interest rates rise to 7%, and you have to sell your bond for $4,867.
This table shows your return on investment:
| Decrease in value of bond |
- $133 |
|---|
| Interest earned over 2 years |
+ $600 |
|---|
If you don’t sell, you’ll keep getting interest payments. If you reinvest that money, you’ll make more interest on it.