Discussion Reply 3.3

In a rising interest rate environment, bond values would change over time through many different ways. One way in which bond values would change involves the prices of the bonds themselves, when the interest rates decrease. In another manner, the prices of bonds would decrease when the interest rates increase. Inflation impacts the pricing of the bond because it directly affects its future cash flow. Due to the high risk of inflation, more and more investors would want a higher yield rate because of the associated risk.

Measures to manage risks include: shortening the time of maturity of the bonds to reduce any negative impact on the price of the bond. The longer the life-span of a bond, then there is an increase in the risk of interest rate that is associated with the bond. In order to maintain firm ground in the investment game, one must be wise in which bonds to invest. No one wants to lose money in investing on bonds that will cause more issues and losses than those that will be fruitful.

Investopedia. (2017, October 10). How Inflation And Interest Rates Affect Bonds. Retrieved January 19, 2019, from https://www.investopedia.com/walkthrough/corporate-finance/3/bonds/inflation-interest.aspx