Monitoring interest rates

If you plan to sell a bondBond A kind of loan you make to the government or a company. They use the money to run their operations. In turn, you get back a set amount of interest once or twice a year. If you hold bonds until the maturity date, you will get all your money back as well. If you sell…+ read full definition 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 investInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition $5,000 in a 5-year corporate bondCorporate bond A bond issued by a company.+ read full definition. 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 investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition:

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 discountDiscount When something sells for less than its normal price.+ read full definition.

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:

If you don’t sell, you’ll keep getting interest payments. If you reinvest that money, you’ll make more interest on it.

Key point

If you plan to sell a bond early, monitor interest rates to time your sale. If interest rates are up, you’ll get less for your bond than you paid for it.