Investment banking is not an exact science. At its most basic, investment banking is a balance between risk (e.g. stock crash, bank failure) and reward (e.g. return on investment, annual percentage yield). This basic understanding has led many people, anxious to find a predictable investment, to turn to bonds. They think that because a bond has a listed maturity and return that those figures are stable and dependable; however, investment banking is more complicated. Interest rates must also be accounted for.

The value of a bond will actually go down as interest rates go up. On your monthly statement, you will still see the return as promised but the actual value of the stock will go down; this rule holds true whether your own individual stocks or interest in a bond fund. The rule of thumb is that for every 1 percent point increase in interest rate, the value of your stock will go down by the duration of the bond in years; for example, a 1 percent increase in interest will cause a 10 percent decrease in value for a ten-year bond. As such, bonds with longer durations present greater risk.

Bonds are not savings accounts; longer term bonds are able to offer higher interest rates because of the risk they present. The problem is that few consumers realize this until it is too late. Money can only be withdraw from a bond under penalty. Once you buy it, it is yours until maturity. While interest rates are currently at significant lows, they will go back up eventually, and the return you sign up for when you buy your bond may suffer as a result.

Bonds clearly are not necessarily a safe investment. The question that remains is, “What is a safe investment?”

High-yield savings accounts are a good alternative. Interest rates on this type of account are currently around that of bonds. While the interest rate will vary somewhat over time, you have free access to your money, so you can always choose another vehicle if the interest rate falls below your desired return.

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