Question

In a rising interest rate environment, how would bond values change over time? As a bond investor, what measures would you take to manage rate risk?

Answer 1

There is a theory that interest rate is inversely related to the bond prices.when interest rate rise, the bond pricess fall, and when the interest rate falls, the bond price rises.

So in a rising interest rate environment, the bond prices would fall because such bonds which will offer the low coupon rate would be highly subject to redemption because people will look for higher rate of interest which will be prevalent in the market. So rising interest offers as an alternative for the current bond yields.

I would diversify into different bonds like short term and long term bonds as well as I would diversify into bonds which will offer different type of coupons with low-to-high as well as such bonds, which are less prone to interest rate rise.

I may be entering into a interest rate swap to gain from such change in market rate of interest.