To me there is a significant distinction between the economic impacts
of changes in interest rates in contrast to how it might affect the valuations of the individual companies I am specifically invested in.
Since long - term bonds change the most in value for a
given change in interest rates, a manager would want to hold long - term bonds when rates are falling.
Since changes in interest rates impact bond funds differently than bonds and CDs, estimates of price sensitivity may be less accurate the larger the shift in interest rates.
This will reduce the risk of the portfolio by very little because all banks are affected by the same economic conditions,
like changes in interest rates.
While most bonds make fixed interest payments, some offer interest payments that «float» with the
overall change in interest rates or increase along with inflation.
Because CD markets, like bond markets, fluctuate
with changes in interest rates, you could end up losing your principal just as if you had sold a bond.
Given that long - term bonds change the most in value for a
given change in interest rates, a manager would want to hold long - term bonds when rates are falling.
Since changes in interest rates impact bond funds differently than bonds and CDs, estimates of price sensitivity may be less accurate the larger the shift in interest rates.
As a minimum, however, the effects
of changes in interest rates should be removed when trying to assess underlying inflation for policy purposes.
Single - bond Duration Calculator and Bond Convexity Calculator: Easily calculate all of the usual duration and convexity numbers, and see how
changes in interest rates change the price of a bond in greater detail.