Friday, November 15, 2013

bond investment is safe, in the long run (Hendricks)

If you buy a bond at a $98.5 (1.5% discount from face value), and hold it till maturity, then there's no uncertainty in how much you will get at the end.

I heard a lot of "common sense" wisdom that bond appreciates and drops with interest rate, and therefore volatile and risky.

(I usually assume default risk is very low for the bonds I consider, at least much lower than the sensitivity to yield.)

However, if indeed a bond loses value due to rate hike, then bond holders always have the "safe" option to hold it till maturity. Its price will eventually rise and end up exactly $100.  Therefore there's absolutely no uncertainty about the terminal value like there is about options, stocks, or futures contracts.

This is one of the most fundamental features of bond as an asset class. I don't know another asset having this feature.

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