Finra warns on bonds

Cautions about duration risk

Feb 14, 2013 @ 4:13 pm

By Dan Jamieson

Finra warned investors today that if interest rates rise - as most market pros expect - bond investors could be slammed by long duration.

In an investor alert, the Financial Industry Regulatory Authority Inc. told investors that in the event of rising interest rates, “outstanding bonds, particularly those with a low interest rate and high duration may experience significant price drops.”

A bond fund with 10-year duration will decrease in value by 10% if rates rise one percentage point, the alert warns.

Bond-fund investors can find measures of duration in a fund's fact sheet, Finra says, and individual bond investors can check with their investment professional, the bond's issuer or use an online calculator to get the figure.

Short duration doesn't mean risk-free, the alert says.

“Bonds and bond funds are subject to inflation risk, call risk, default risk and other risk factors,” the warning says.

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