SEC ISSUES BULLETIN ON INTEREST RATE/BOND PRICE RELATIONSHIP

FROM: U.S. SECURITEIS AND EXCHANGE COMMISSION

The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to make investors aware that market interest rates and bond prices move in opposite directions—for example, when market interest rates go up, prices of fixed-rate bonds fall.

You may have noticed articles in the media about investors "chasing yield," the so-called "bond bubble," or predictions about declines in bond prices. Some of these warnings about a drop in bond prices relate to the potential for a rise in interest rates. Interest rate risk is common to all bonds, particularly bonds with a fixed rate coupon, even U.S. Treasury bonds. (Many bonds pay a fixed rate of interest throughout their term; interest payments are called coupon payments, and the interest rate is called the coupon rate.)

The purpose of this Investor Bulletin is to provide investors with a better understanding of the relationship among market interest rates, bond prices, and yield to maturity of Treasury bonds, in particular, although many of the concepts discussed below generally apply to other types of bonds as well.