One Up, One Down.

by astanhaus

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Bonds are a safe bet when the market is in meltdown mode.

(click on the bold-faced vocab word:))

But, I’ll get bitten by a bond when the economy is bullish and interest rates rise accordingly. A bond’s worth is best explained in terms of present value (warning: math ahead).

Even though the $$ loaned will not be mine for awhile, I want to know how much it’s worth NOW.

I need to divide the bond’s payoff by (1+ the interest rate).

Sorry, but it’s easier to rationalize with fractions. 2/4 is larger than 2/5.

Accordingly, when interest rates rise the current value of bonds lowers. AKA 1000/1.05 is larger than 1000/1.1.

That one looked painful, so I plug it into a calc.

My savings account cannot wait for the interest rates to skyrocket. But bond-buyers (*especially long-term bond-buyers*) beware!

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(Originally published on Amanda Stanhaus’s financial literacy blog: XO, Bettie.)