Tuesday, January 24, 2017

Variable Rate Bonds

Some years ago, I bought some Sallie Mae (Student Loan Marketing Corp., if you don't speak Wall Street) bonds that were variable rate interest.  Why?  Fixed rate bonds, which are more common, tend to drop in value as interest rates rise above the coupon rate.  My hope was to have something not subject to value drop as interest rates rose.  The bonds are coming due on February 1.

In retrospect, it was a mistake.  The conventional wisdom for bonds is buy and hold to maturity.  That is all I have ever done.  A fixed rate bond bought back then would have been a better choice because higher yield.  The good news is that the value at maturity will be $50,000; I only paid $45,575 at purchase, so a nice capital gain along with interest for the last several years.  Also, the warm feeling of helping college students get educated (either in the formal sense, or "Why did I borrow $80,000 to get MA in Puppetry?").

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