Finra warned investors that if the interest rates rise – as most pros expect – bond investors could be slammed by long duration, writes Dan Jamieson in a Feb. 14th., 2013 article for InvestmentNews.com
FINRA, the Financial Industry Regulatory Authority Inc. in an investor alert, told investors that in the event of rising interest rates, “outstanding bonds, particularly those with a low interest rate and high duration may experience significant price drops.”
FINRA gave the example of a bond fund with 10-year duration will decrease in value by 10% if rates rise one percentage point, the alert warns.
FINRA added that bond-fund investors can find measures of duration in a bond fund’s fact sheet, and individual bond investors can check with their investment professionals, the bond’s issuer, or they can use an online calculator to get the figure.
Short duration doesn’t mean risk-free, the alert says.
“Bonds and bond funds are subject to inflation risk, call risk, default risk and other risk factors,” the warning says.
Bonds are not without risk, however in many instances bonds are presented as the safe alternative.
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