Question

Explain what you learned about the relationship between interest rates and bond value. What makes interest rates change? Is it possible to lose money if you invest in bonds, even federal government bonds? Why or why not?

Answer 1

There is an inverse relationship between the interest rates and bond value. As the interest rate increases, the bond value decreases and vice-versa.

The interest rates change due to higher growth rates which lead to higher inflation.

Yes, you can lose money because if you invest in federal bonds and then the interest rates begin to rise, the price of the bond falls. However, if your time horizon is longer say 3 to 5 years, there is no loss. Hence there can be loss in the short, but the interest payment nullifies long term losses.