“Interest rate changes are among the most significant factors affecting bond return.”
When it comes to how interest rates affect bond prices, there are three cardinal rules.
When interest rates rise–bond prices generally fall.
When interest rates fall–bond prices generally rise.
Every bond carries interest rate risk.
This article describes how each of the “3 cardinal rules” described above affects a bond investment. It also explains the role the Federal Reserve plays in determining interest rates in the economy. Specifically it describes the federal funds rate, the discount rate, and basis points for bond investments.
Finally, this article provides information on where to find economic indicators that measure not only changes in interest rates but also other economic indicators for the nation’s economy.
Automated investment services are expanding. Many financial service companies are offering “robo advice,” in which investors complete an online questionnaire and a computer program generates and monitors a portfolio of funds. Robo-advisers are also designed to automatically rebalance a portfolio based on changes in the market as well as any changes in the amounts allocated to certain investments.
With many investors already making their own trades online, investment companies believe that robo advisors have these additional benefits:
lower costs for obtaining advice and conducting transactions.
an ability to adjust the portfolio for tax purposes by selling shares that have declined to offset gains.
an easier investment approach for younger clients with less-complicated financial lives.
Some will be concerned about automated portfolio management. Human advisors will still be available to address issues about mortgages, insurance, estate planning, retirement income, and other topics that robo-advisers are not yet equipped to answer.
For additional information on robo advice, click on the following articles:
Investors flock to Apple’s $12 billion debt offering.
The demand for Apple’s new bond issues with maturities ranging from three to thirty years and rated double-A-plus, the second highest rating, reflects a corporate-debt market that is putting in a surprisingly strong performance this year. The rate for Apple’s 3-year bonds was 1.068 percent; the rate for 30-year bonds was 4.483 percent–about 1 percent more than U.S. Treasury securities.
Although Apple has a healthy cash pile, about $150 billion, it chose to issue bonds to pay for expanding its stock buyback program and increasing its dividend to stockholders. According to many experts, the fact that Apple has such a large cash surplus and is currently the most valuable U.S. firm based on stock-market value helped assure bond buyers that there is little risk in Apple bonds.
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Remind students that once a bond is issued, the price can increase or decrease because of the inverse relationship between a bond’s price and overall interest rates in the economy. (Higher interest rates in the economy = lower prices for existing bonds; and, lower interest rates in the economy = higher prices for existing bonds.)
Explore different reasons why Apple chose to issue bonds instead of using some of its cash surplus. (Reasons include taxation of cash held in off-shore accounts and financial leverage.)
Apple chose to sell bonds to fund its share buyback program and increase dividends to stockholders. What are the advantages of selling bonds instead of using part of its cash surplus?
Why would a short-term bond pay lower interest than a long-term bond?
Given your current age and financial situation, would you invest in Apple corporate bonds? Why?