A reader asked, in reference to my column on the “Bond Bust Ahead,”
As interest rates climb, bond prices drop. I understand that part. But, for an “investor” who owns bonds to maturity how does this translate into losses? I still get the same coupon payment and my principal at the end of the term.(Agreed that with higher inflation my principal is not the same in $ terms). Since I am not trying to sell, the price drop in bonds does not really affect me.
Do bond funds operate differently? With the focus of the money managers being to generate higher coupon payments?
I am having a hard time understanding the difference between a bond fund and “bonds”.
My response was:
You’re right that if you hold to maturity, fluctuations in prices don’t directly impact you. But bond funds are marked to market every day, so if market prices go down, holders of bond funds will get statements telling them they’ve lost money. And if you’re planning to hold to maturity but suddenly find yourself needing to sell, you’ll have to take a loss. So the price does matter—although in many cases you’re probably better off ignoring it.
Is that a good enough answer?