Bonds can pay exactly what they promised and still lose value. That’s the part most investors miss, and it’s why this conversation matters if you’re retired, nearing retirement, or trying to make sense of a bond market that suddenly feels less predictable. Jag is joined by Alex Cabot and Ed Lambert of Birch Run Financial to unpack the real relationship between interest rates and bond prices, including why rising rates push existing bond values down, why falling rates can make them more valuable, and why the bond you own is not the same as the bond fund you buy.
If 2022 left you wondering how both stocks and bonds could fall at the same time, this episode puts that year in plain English. Alex breaks down the mechanics with simple examples, from coupon vs. yield to premium and discount pricing, yield to maturity, and duration, the measure that helps explain why long-term bonds react more dramatically than short-term ones.
He also draws a sharp line between interest rate risk and credit risk, so you can tell the difference between a bond dropping because rates changed and a bond dropping because the borrower is in trouble.
Ed brings the lesson home with the real-world impact from 2022, when the Bloomberg Aggregate Bond Index lost about 13% as the Fed raced from near zero to roughly 4.5%. He explains why that selloff shocked so many investors, how rising rates affect both current portfolio values and future reinvestment rates, and when individual bonds may make more sense than bond funds for specific goals like funding a tuition bill or matching a future expense.
You’ll also hear how to think about credit quality, duration, liquidity, taxes, and time horizon when building a fixed-income allocation, plus why the right bond strategy is less about predicting rates and more about understanding what you own and why you own it.
Essential listening if you want bond investing to feel a lot less mysterious and a lot more usable in your financial plan.
(00:00) Intro
(02:39) Why bond prices can fluctuate even though bonds are conservative
(05:33) Bonds sold at a premium when rates fall
(06:29) Coupon versus yield explained
(07:55) Yield to maturity and why it differs from coupon rate
(09:46) Duration as a practical measure of interest rate risk
(11:40) Interest rate risk versus credit risk
(15:40) Why 2022 shocked bond investors
(18:03) Why stocks and bonds both fell in the same year
(19:58) Individual bonds versus bond funds and ETFs
(22:22) Higher rates improve future bond income
(25:05) Why retirees use bonds and cash for spending stability
(26:05) Why not all bonds behave the same
(27:25) The interest payment and market value are different