The Basics Of Interest
We may not always be aware of it, but interest rates play an important role in our everyday lives. Whether you're in the market for a car, a home, or a personal loan at the bank, interest rates can greatly affect your buying power.
As an investor, you need to keep a close eye on the overall trend of interest rates because changes to them can have a major effect on your investments.
Major shifts in direction, up or down, should cause you to review present investments and consider potential opportunities. Staying informed of general interest rate trends doesn't require much time. In fact, it just takes a few minutes a week. Key rates that are important to investors are published daily in newspapers. Regular review of this key indicator may often give you mixed signals. Once a consistent trend emerges, however, the following guidelines can help you assess the impact of rate changes on your investments as well as direct future investment decisions.
As Interest Rates Go Up, Bond Prices Go Down
The first thing to remember when assessing the impact of interest rates on your investments is that there is a reverse relationship between interest rates and bond prices. As interest rates go up, bond prices go down because the bond's fixed coupon (interest rate) becomes less attractive. If a bond's price has dropped below its face value (because prevailing interest rates for that particular maturity are above its coupon), the bond is said to be trading at a discount. Conversely, if rates have declined below the coupon rate, the bond is trading at a premium above its stated value. If interest rates are going down and you have long-term bonds that were purchased when rates were higher, you may want to consider holding those bonds in hope of future gain. On the other hand, you may decide to sell the bond to reduce exposure if rates begin to climb again.
To learn more about interest rates and how they affect your investment portfolio, use our Find An AdvisorOpens a new window in your browser. tool to locate a CIBC Wood Gundy Investment Advisor near you.