Interest Rate Risk

Think about rising rates when you hear the term interest rate risk. For example, if you have a variable rate mortgage or own a bond, you’re exposed to interest rate risk. The higher the risk, the more susceptible your investments are to the rise in the cost of borrowing. In the case of a floating-rate mortgage, the exposure is straightforward. If interest rates are higher when your mortgage is to reset, you just have to fork-out more each month. In the case of bonds, rising interest rates lead to falling bond prices, and a shrinking of your portfolio. It may seem counter to common sense but this is how the relationship between interest rates and bond prices plays-out. When interest rates rise, the old bonds are less attractive than new instruments that pay-out more. As a result, there is less demand and lower prices for the lower yielding bonds.

Mark Warshawsky on the Retirement Income Market

Mark J. Warshawsky is Director of Retirement Research at Towers Watson.

Dr. Warshawsky served as assistant secretary for economic policy at the U.S. Treasury Department from 2004-2006 and he has held senior level economic research positions at the Federal Reserve Board, the Internal Revenue Service and...

Pimco’s Gross Describes a New Age of Risk

Pacific Investment Management Company (Pimco) founder and co-chief investment officer Bill Gross offered a revised view of the global investing landscape in a letter published on the company’s website. 

As the manager of the Pimco Total Return Fund, Gross’s 2011 investment decisions were driven in part by the “new normal” thesis. 

The new normal view...

Record High Deficits for Defined Benefit Pension Plans

Defined benefit pension plans are the traditional and increasingly rare type of pension plans offered through employers. In contrast to defined contribution pension plans such as the 401(k), participants in defined benefit (“DB”) plans receive contractually guaranteed income and assume none of the risks (investment risk, interest rate risk, longevity risk , etc) associated with producing that lifetime income stream. The problem is that defined benefit plans are scarce, and many of...

Buffett Positioning Berkshire Bond Portfolio in Light of Inflation Concerns

Bloomberg reports that Warrenn Buffett is shortening the duration on Berkshire Hathaway's fixed income holdings. Twenty one percent of Berkshire's bond holdings are short duration and due in less than one year. This represents a 3 percent increase from eighteen percent on March 31 of this year, and a 5 percent increase relative to the second quarter of 2009.