We all know that an unforeseen change on interest rates will negatively affect the value of your investments. And the relation between the two is a bit confusing to understand; when interest rates go up, the value of the bonds go down and when interest rates do down, the value of the bonds go up.
Assume that you’ve purchased a bond with a maturity of ten years, which has a coupon of 10.0%, and you have bought it at par, by investing $1,000. At this point of time, your bond value is exactly what you have paid for. And based on your tenure and investment you will receive an annual interest of $100 and a return of your principal at maturity.
However, the market conditions are not always the same, and you may witness some fluctuations because of rise and fall of interest rates, and the movement of bond prices and bond yields is simply a reaction to the changes in market conditions.
Let’s assume that there is a rise in interest rates to 13%. Since the new bonds are being traded with 13% coupon and yours being 10% coupon, people will tend to invest in the one with higher returns say 13% coupon bond. Therefore, the value of your bond is not in demand anymore.
Also, if investors want to invest the same $1,000 and purchase a bond that pays a higher interest rate, why would someone pay $1,000 for your lower-interest bond? In this case, the value of your bond would be less than $1,000. Hence, your bond will be going to trade at a discount.
Similarly, if there is fall in interest rates, the value of your bond would rise because investors would not prefer to buy a new issue bond with a coupon as high as yours. In this case, your bond value would be worth more than $1,000. Hence, it would trade at a premium.
One thing we can observe is that bonds with higher duration are most sensitive to interest rate changes, i.e. the greater duration of the bond, the greater its price volatility percentage. Therefore, duration of a bond plays a significant role in determining interest rate risk. Another observation we can point out is that investors spend countless hours calculating and analyzing interest rate trends and forecasts.
Well, we all know now that interest rate risk is one of the main variables to look after for our investments, and that is complicated to keep up with, calculate maybe, but investors and brokers do not have extra time to figure out. They need to identify it easily! The good news is that, the Fintech Company “PFITR” is bringing you ONE new smart solution that will help mitigate the problem with interest rate risk, with all of the data available that the “Bond Price Validation tool” delivers. It is a solution that helps investors identify, measure and minimize the risks on fixed income investments without any need for extra calculations and analysis.
The BPV tool is pre-equipped with transparent unbiased market information along with charts and graphs, such as the treasury spreads of 26 weeks and 30 days. Not only this, the BPV tool will provide you with real-market prices, coupons, ratings, yield to maturity, historical duration and call provisions which investors need to look at before purchasing bonds.
The best part is that all of this information is readily available at one place; one source only.
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PFITR is a software-as-a-service (SaaS) technology company that developed the “Bond Price Validation tool” and is currently working on other solutions that improve the management of fixed income portfolio’s, including the reporting side, for regulation and compliance purposes.
PFITR’s mission is to empower bond investors and bond agents to be better stewards of their portfolios with innovative user friendly technology, that equips them with transparent data for them to invest wisely and report back easily.
For more information, visit www.pfitr.com