Question:

In a recent column you mentioned that someone who has all their money in fixed interest risks losses if interest rates rise. I assume this means capital losses. Could you explain the mechanics of how that could happen? 

 

Answer:

When I used the term “fixed interest”, I was not referring to interest bearing bank accounts, I was talking about government and corporate bonds where the interest rate is fixed. 

These perform well when interest rates are dropping, but if interest rates rise they can give the holder a capital loss because they become relatively less attractive to bonds that are being issued at higher rates. 

Also, rising interest rates usually mean inflation  - one of the effects of inflation is that the maturity value of the bond is less in today’s dollar terms.