Recently, FINRA, the Financial Industry Regulatory Authority Inc., issued an Alert telling investors that if interest rates rise, “outstanding bonds, particularly those with a low interest rate and high duration, may experience significant price drops.”
Many big investors have already have warned that risk in the bond market is rising. However, last month's slight move in interest rates made FINRA's warning more important.
Posted on Finra's website, the Alert said a bond fund with a 10-year duration will decrease in value by 10% if rates rise 1 percentage point. There are many investors who don't realize they can lose money in what they think are safe bond funds.
FINRA urges bond fund investors to check on the duration in the product's fact sheet. The FINRA Alert points out that not even short-duration bonds are free of risk.
“Bonds and bond funds are subject to inflation risk, call risk, default risk and other risk factors,” the warning said.
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