Someone who is not interested in selling their bond before its maturity date does not have to worry about the current bond market and its impact on the price of their bond because they will hold the bond until it matures and receive the full principal (face value) back, as well as the fixed interest (coupon) payments over the life of the bond, regardless of price fluctuations in the market. The market price fluctuations primarily affect investors who sell their bonds before maturity, as bond prices move inversely with interest rates. However, if the investor holds to maturity and the issuer does not default, they are guaranteed to get their principal and the agreed-upon interest payments. Key reasons include:
- The guaranteed principal return at maturity is unaffected by intermediate market price changes.
- Fixed interest payments remain the same regardless of market interest rate movements.
- No capital loss is realized if the bond is not sold before maturity, even if market prices fall.
- The bond's market price may fluctuate due to interest rate changes, inflation expectations, or credit quality changes, but these do not affect the holder who stays invested until maturity.
However, this strategy still involves credit risk (issuer default risk) and reinvestment risk (possible lower rates when reinvesting coupon payments). Therefore, for an investor intending to hold a bond until maturity, short-term market price volatility does not impact the economic outcome of their investment.
