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Bonds and Short-Term Rates - Annuity Rates, Annuities, Annuity Quotes and Fixed Annuities
Bonds and Short-Term
Interest Rates

In recent years, interest rates have hovered near 40-year lows, easing the burden on borrowers and creating a flurry of activity in the refinancing industry. Because inflation has also remained low, the Federal Reserve has been able to maintain its accommodative stance toward the economy and keep target interest rates at bay.

But as the economy improves, many people believe that short-term interest rates will soon be on the rise. If this is the case, fixed-income investors may want to develop an investment plan that takes advantage of fluctuating yields.

Extend Your Reach
Bond laddering is one technique that helps investors shield their portfolios when interest rates are low and exposes them to greater growth potential when interest rates rise. This strategy involves splitting a bond investment to purchase several different bonds with varying maturities. For example, an investor might set up a ten-year bond ladder by buying five bonds that mature in two, four, six, eight, and ten years, respectively. When the first bond comes due after two years, the principal is used to purchase a new ten-year bond to keep the ladder going.

The result is that, during periods of low interest rates, only a portion of the investor's portfolio is committed to low-yielding bonds. And when interest rates rise, money becomes available to purchase new bonds with potentially higher yields.

Sell Wisely
Should an investor decide to sell a bond before it reaches maturity, rising interest rates can affect its value on the open market. Bond values generally move in the opposite direction of interest rates. For example, if you purchased a $1,000 bond that paid 5% interest (or $50 a year) and decided to sell it at a time when new bonds were offering 6% interest (or $60 a year), your bond would be worth less to a prospective buyer. This is especially true for longer-term bonds that lock in interest rates for longer periods of time.

Just as equity investors are subject to stock market whims, fixed-income investors may find themselves at the mercy of fluctuating interest rates. Keeping an eye on emerging trends may help you protect your portfolio and pursue growth despite volatility.

1) The principal value of bonds may fluctuate due to market conditions. If redeemed prior to maturity, bonds may be worth more or less than their original cost.

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