How Inflation Influences the Value of Bonds and Bond Funds

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Doug Goldstein July 28, 2022

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Bond funds are dropping, and at the other end of the financial seesaw, interest rates are rising. Listen to this podcast to understand the relationship between interest rates and bonds (and bond funds).

Basically, a bond is a loan you make to a company/government: You lend money and they promise to pay it back to you plus an agreed upon interest rate. However, after buying the bond, life, the economy, and interest rates might change, and these changes often change the value of your bond holdings.

There’s an inverse correlation between bond prices and interest rates. This is because as interest rates increase, the interest you were receiving on an older bond is no longer as attractive as it once was, so if you want to sell the bond/bond fund, you’ll have to accept a lower price in order to find a buyer.

When buying bonds, don’t forget to look at two things: both the price and the total return. Sometimes, even if the bond prices go down, the investment may be a good one for you if you collect enough interest while you hold the position.

As mentioned in the podcast, here’s a link to the article about the differences between bonds and bond funds.

Oh, and my wife really liked the jokes in the beginning of the episode. Let me know if they made you smile.

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