Interest Rate Risk and Its Impact on Bond Prices

An interest rate risk is the probability of an investment loss triggered by an upward or downward movement in the prevailing rates. For example, if interest rates rise, the value of bonds or other fixed-income investments will decline. So why is the interest rate risks in bonds so consequential to bonds compared to other investment avenues? First, bonds of different maturity rates react differently to interest rate risks. Second, the larger the duration of the longer-term security means a higher interest rate risk for the concerned securities. This is why long-term bonds often offer a maturity risk premium for the added risk of interest rate changes. The expected rates of return on longer-term bonds are usually higher than those of short-term bonds to compensate investors for taking on more risk. However, this risk can be reduced by buying bonds with different maturity rates.

What The Strengthening of the Dollar Means

Inflation, gas prices over the last year, interest rates – everything seems to be on the rise. But the one thing most people have not realized is rising is the strength of the U.S. dollar. The dollar is so strong now that 1 Euro is equal to 1 U.S. dollar, something that hasn’t happened in 20 years. So what does this mean for the economy? American investors can now earn higher interest on their investments at home. As a result, investors are liquidating foreign assets and moving money back home. This shift has further led to an increased demand for the dollar and hence a drop in the price of imported goods. Lower import prices are great for combating inflation. However, a strong dollar also translates to exports from the U.S. becoming more expensive and inevitably forcing international companies to source cheaper alternatives elsewhere – which is bad for the stock market.