The theme this week on the One Minute Retirement Tip podcast is could you pass this basic financial literacy quiz? 

Today’s financial literacy quiz question is: If interest rates rise, what will typically happen to bond prices? Rise, fall, stay the same, or is there no relationship?

The correct answer is bond prices will fall when interest rates rise. They have an inverse relationship and function like a seesaw - when one goes up the other must go down. 

Interest rates are very low right now and have already started to tick up again. With that in mind, what would you expect to happen to the value of your bond portfolio if interest rates continue higher?

Yep, you guessed it! The value of your bond portfolio will drop. 

One interesting explanation that I don’t think about much is that this happens  “because as interest rates go up, newer bonds come to market paying higher interest yields than older bonds already in the hands of investors, making the older bonds worth less.” 

You can protect yourself from higher interest rates by keeping your bonds invested for short and intermediate terms. Bonds that will mature in less than a few years won’t see as big of a drop in price as a bond that matures in 10 or 15 years. Diversifying into some international bonds may also help since interest rate markets vary from country to country, and lastly, interest rates and inflation are often tied together, so owning treasury inflation protected securities (or TIPS) is also a great hedge to rising interest rates within your bond portfolio. 

That’s it for today, Thanks for listening! 

My name is Ashley Micciche and this is the One Minute Retirement Tip. 

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