The Financial Industry Regulatory Authority issued an alert Thursday underscoring the importance of a bond’s duration risk in the current low interest-rate environment.
“With interest rates hovering near all-time lows, investors should make sure they know their duration numbers,” said Gerri Walsh, FINRA’s vice president of investor education, in a statement. “Whether investors own individual bonds or bond funds, they need to understand that outstanding bonds with a low interest rate and high duration may experience significant price drops if interest rates rise.”
The alert, Duration—What an Interest Rate Hike Could Do to Your Bond Portfolio, explains that although stated in years, duration is not simply a measure of time. “The duration of a bond or a bond fund also signals how much the price of a bond investment is likely to fluctuate when interest rates move up or down.”