Bond prices move in the opposite direction of interest rates. When rates fall, bond prices rise. When rates rise, bond prices fall. To determine how dramatic a fund's ups and downs might be, check out its duration—a measure that considers a bond's maturity, the cash flows from coupons and principal, and current interest rates to produce a risk measure that investors can use for comparisons. The higher a bond's duration (measured in years), the more it responds to changes in interest rates. If a bond has a duration of five years, you can expect it to gain 5% if interest rates fall by one percentage point, and to lose 5% if interest rates rise by one percentage point. So a bond with a duration of four years should be twice as volatile as a bond with a duration of two years.
Sponsored Links