If you’ve watched the news lately, you’ve noticed there is a lot of talk about interest rates.
So you might be asking: Why should I care? What’s the big deal? And will it affect me?
Besides determining the cost of a loan for your house or car, interest rates have a lot to do with… pretty much everything.
They can affect employment, foreign investments, the stock market, and ultimately, GDP. For example, they drive employment. Why? Because if a company can borrow at a low interest rate, they can use remaining funds to hire more people. But if interest rates are higher, they may not be able to employ as many people.
OK, great. So they run the world. Check.
Besides those effects, they can also have an significant impact on your personal investment portfolio. In particular, your bonds. Why?
When interest rates rise, prices of existing bonds go down. That’s because it’s a better deal for an investor to buy a brand-new bond that offers him a higher interest rate (let’s say where he gets $10 per year), instead of the old bond that you have (let’s say that it offers $7 per year). So the price of your old bond goes down.