Posted on December 28, 2013 | Classroom
Bond prices go up and down in response to two factors: changes in interest rates and changes in credit quality. Individual investors who purchase bonds tend to worry a lot about the safety of their money. Generally, however, they tie safety to credit considerations. Many individual investors do not fully understand how changes in interest rates affect price. Since the late 1970s, changes in the interest rate environment have become the greatest single determinant of bond return. Managing interest rate risk has become the most critical variable in the management of bond portfolios. In this article, we’ll see why.