Page 24 - South Mississippi Living - October, 2016

COASTNOTES
FINACIALFUTURES
Interest Rate Changes
The Federal Reserve’s Federal Open Market Committee (FOMC) determines the direction of our nation’s monetary policy. It is responsible for setting
the federal funds rate, the rate banks charge each other for overnight loans. The FOMC may see fit to lower rates to help stimulate the economy or raise interest rates in order to keep inflation under control. It is important for bond investors to have an understanding
of how their investments could be impacted by changing interest rates.
As interest rates change, so do the values of existing bonds. Bond prices move inversely to interest rates; when interest rates fall, the prices
of outstanding bonds generally rise. When interest rates rise, the prices of outstanding bonds typically fall in order to bring the yield of older bonds into line with the higher interest rates offered by new issues. The longer
a bond’s maturity and the lower
its coupon rate, the more it will be affected by a change in interest rates.
Rising rates will not have an effect on the income you receive from
your bonds or your bonds’ maturity value, for when a matured bond is redeemed, you will receive back the face (par) value of the bond. However, it is important to note that if you sell your bonds prior to maturity, and
story by Suzie Sawyer
interest rates have gone up, the value of the bond you are selling may have decreased, and you may have to sell it at a loss.
When the FOMC cuts its discount rate, on the other hand, many investors may find themselves wondering just what a rate cut means for the economy. Typically, rate
cuts lead to a weaker dollar, which encourages Americans to spend.
With that being said, how long does it typically take a market to rebound after rate cuts?
Historically, the economy begins
to improve 6 to 12 months after the Fed starts to cut rates. While past performance is not a guarantee of future results, and it is impossible to predict the future, we do know that historically, the market has always come out of its slumps.
While bonds can play an important role in any portfolio, it is critical that you familiarize yourself with how interest rate movement can impact your bonds — whether individual bonds or bond mutual funds. Will you be prepared should interest rates change? For more information on how your bond investments could
be affected, contact your financial professional today.
Article provided by Suzie P. Sawyer, Managing Director/Investment Advisor Representative of Trinity Investment Services, LLC, who can be reached at 228.864.4460. Securities offered through Century Securities Associates, Inc., Member SIPC and FINRA, a subsidiary of Stifel Financial Corp.
Home Office: 501 North Broadway, St. Louis, Missouri 63102, 314.342.4051.
24 SOUTH MISSISSIPPI Living • October 2016
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