FINRA Warns Bond Investors on Price Fluctuation Risk
Bonds with a low interest rate and high duration may experience significant price drops if interest rates rise, according to a new FINRA Investor Alert called Duration—What an Interest Rate Hike Could Do to Your Bond Portfolio.
FINRA issued the Alert to help investors understand the importance of duration risk. Although stated in years, duration is not simply a measure of time. The duration of a bond or a bond fund also signals how much the price of a bond investment is likely to fluctuate when interest rates move up or down.
As explained in FINRA’s Alert, a bond fund with a 10-year duration will decrease in value by 10 percent if interest rates rise 1 percent. In contrast, if a fund’s duration is two years, then a similar 1-percent rise in interest rates will result in only a 2-percent decline in the bond fund’s value.
To find your bond fund’s duration, investors should look on the fund’s fact sheet. Investors holding individual bonds should start by asking their investment professional or the bond’s issuer.
Investors should also keep in mind that just because a bond or bond fund’s duration is low, it does not mean the investment is risk-free. In addition to duration risks, bonds and bond funds are subject to inflation, call, default and other risk factors.
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Contact Fort Lauderdale securities litigation and arbitration attorney Howard N. Kahn, Esq. if you or someone you know has a securities or broker dispute. He is an experienced securities litigation and arbitration attorney, and is available to assist individual investors, brokers, and brokerage firms involved in securities matters. You can reach him at 954-321-0176 or online.
