 FRONT PAGE Archive Index Feedback |
|
|||||
|
|||||
|
| |||||
Money Muse
Money MuseTime to Evaluate Fixed-Income Investments
By Marko Tubic
Apr 25, 2002 -- If you own a business and need to take out loans, you've probably been happy to see interest rates fall, as they've done for the past couple of years. And the same is true if you've applied for a mortgage or refinanced your home. But if you're an investor, the story is a bit more complex.If you bought a bond a few years ago, then you shouldn't be sorry that the rates have fallen. That's because, all things being equal, the value of your bond has risen; it's worth more to investors because it offers a higher interest rate than what's currently available on the market. So, if you were to sell your bond on the secondary market, you would typically be able to receive a price that's higher than the face value.
On the other hand, if you happen to invest in mortgage-based securities--such as those issued by Ginnie Mae (the Government National Mortgage Association) or Fannie Mae (the Federal National Mortgage Association)--you may be looking at a slightly different picture. When interest rates drop and many people refinance their mortgages, investments based on those mortgages will reflect the rates at which new loans are made. Therefore, you are more likely to receive some of your principal back sooner than expected, which may improve your return but reduces the potential for price appreciation. Of course, this is a major reason why these types of securities generally pay higher interest rates than Treasury bonds.
Thus far, we've looked at fixed-income investments that you may already own. But what if you want to buy one now? If you'd like to supplement your current income with interest payments from a bond, today's lower rates are not particularly welcome news. However, bonds still provide good income on the form of regular interest payments, and you can expect high-quality bonds to repay their principal at maturity. In addition, bonds can help you diversify your portfolio--and diversification is always a key to long-term investment success.
Still, there are steps you can take to help control your income, even in low-rate environment. For example, when purchasing a bond, you may want to get one with a longer maturity (more than 10 years). Usually, though not always, longer-term bonds pay higher rates than shorter-term ones. However, you'll have to keep in mind that longer-term bonds carry a greater interest-rate risk--the possibility that rising interest rates will reduce the value of your bond.
Ultimately, you'll want to look at your entire fixed-income portfolio from time to time to see if it still meets your long-term objectives. You may want to make some adjustments, depending on your need for income and your portfolio diversification. Before you make any drastic changes, though, remember that you're investing for the long term--and you should not make wholesale changes based on short-term interest rate predictions or market movements.
Marko Tubic is with the Fremont Edward Jones Office @285-1777.
Reader Comments
Discuss this article in the forums!
No comments yet!