Re:Potato paradox
by jacobkg on Monday August 13, 2018 @11:55AM
(#17751011)
That’s true only if the bond has an “infinite” term. Meaning it pays interest forever but you never get your initial principal back
If a bond has say a one-year term then it won’t lose 50% of its value if interest rates double from 1 to 2 percent because you still get your original full investment back after one year. It’s value instead drops by about 1%.
For a longer term example, a bond purchased for $1,000 and 1% interest rate with 30 years left is worth $776 if interest rates rise to 2%
If a bond has say a one-year term then it won’t lose 50% of its value if interest rates double from 1 to 2 percent because you still get your original full investment back after one year. It’s value instead drops by about 1%.
For a longer term example, a bond purchased for $1,000 and 1% interest rate with 30 years left is worth $776 if interest rates rise to 2%
Source: https://m.free-online-calculator-use.com/bond-value-calculat...