I have two questions about bond investments. First, with individual bonds, would a person be better off keeping the bonds to maturity when rates went up and receiving the full value at maturity? Or should he sell and reinvest in higher interest rate bonds? Second, does this work with bond funds? Do fund managers hold bonds to maturity, or do they generally sell and reinvest when interest rates are going up? — J.T., Austin
On highly liquid and secure issues such as Treasuries, the market adjusts the price of the bonds so that the discounted present value of an older, lower-coupon obligation would be identical to the present value of a new bond with a higher coupon. Some of the damage done to lower-coupon bonds in a rising-rate market is reduced by reinvestment of the coupons at the new higher rates.
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