Uhm... @jenek-cowboy, not to be rude... but obviously you don't know what you're doing... Read my earlier post... when the interest rate rises from 2.5 to 3.5%, you will lose about 30% on your investment... Okay, minus the 2.5% coupon... but still a nice return of -27.5%... minus/negative/loss!!!!!!!!
I do not understand how this may happen. In Russia during crisis of 2014 year the govenment bond fell from 8% to 16% and this meant that investor lost up to 10% only. How it possible to lose 30?
Okay, here's a basic info on bond pricing mechanics... Say you have a bond of 1 year maturity (bond A). Face value 1.000 and coupon 2.5%. So return is 25 dollars on 1000 investment. Now, if another bond comes along with coupon of 3.5% (bond B), that would mean investors would rather invest in that one, since they get 35 dollars on 1000 investment. So... nobody interested in bond A at 2.5% anymore. For bond A to be interesting again, it should match the return on bond B... so that would mean that the 25 dollars coupon of A is discounted with 3.5% for one year... That bond A with 1 year maturity will drop to about 990... 990*1.035 = 1025, 1000 notional plus 25 coupon. So that's a 1% loss. Do that with a 30 year bond with 30 years of compounding.... and you'll lose a lot more. About 30%... (anyone keen to do the exact maths and correct me please do... I know it's actually a bit less than 30%.. but still significantly.)
YES!!! Eventually, I understand that!Thank you! It is because of multiplicating effect of 30 years period. And then what should i do in my case? To risk 30% of deposit it is not good for me. I am not ready to wait 30 years to get my money back I am just want a safe place to keep my money, because it is too risky to keep money in Russia. What should i do? Buy some short term bond ? I am ready even for 1%. And is it safe to keep money in IB?
We are currently in very troubled water: very strong gains in almost every instruments for the last few years, prices for houses are much higher than before 2008, interest as low as the can be, national debts are about 100% of GDB for almost all western countries. I don't see any save heaven, sorry. In such a low interest environment there could not be any save heaven; because everyone would borrow as much as they could and invest with a margin account in that instrument, building up a bubble. Does this makes sense? I could imagine holding cash for the next few months maybe years is not that bad, and maybe investing a small amount in instruments you believe in.