long bond

What are the advantages and disadvantages of buying long bonds rather than short bonds?

The advantages of buying long bonds rather than short bonds are:

• you get to keep attractive interest rates longer;

• yields generally are higher on long bonds versus the yields you can obtain on short bonds;

• price swings are more significant, and thus profits are more substantial when interest rates fall;

• price swings are more dramatic when you hold a longer bond and its credit rating is upgraded, permitting it to trade at a lower yield to maturity regardless of what interest rates in general are doing.

• you are stuck with unattractive rates longer (unless you want to take your lumps and move on);

• if the yield curve begins to take on a negative shape, or even if it simply begins to rise, as a holder of long bonds you probably will have much larger capital losses than you would have if you had chosen to buy shorter maturities instead;

• price swings are more dramatic when you hold a deteriorating credit and the bond's maturity is longer.

Stephanie G. Bigwood, CFP, ChFC, CSA, Assistant Vice President, Lombard Securities, Incorporated, Baltimore, MD