Evaluate and Manage Your Interest Rate Risk

Understanding Interest Rate Risk

and How You Can Manage It

Investing in individual bonds and bond funds can help you diversify your portfolio because bonds are often less volatile than stocks. And bonds can give you a regular income no matter the interest rate environment. Review bond fund basics.

But there are some risks you should be aware of in bond investing. One of them is interest rate risk. 

What Is Interest Rate Risk?

Interest rates help determine a new bond’s coupon—that is, how much income you will receive from the bond’s interest payments. While coupons may not change, the prices of bonds fluctuate as interest rates fluctuate.

Interest rates and bond prices move in opposite directions:

When market interest rates rise, newly issued bonds generally offer higher yields, and the prices of existing bonds with lower yields fall. The possibility that a bond you hold will lose value due to rate volatility is known as interest rate risk.

How Rising Interest Rates Impact Bond Investments

How You Can Manage Interest Rate Risk

Interest rate risk cannot be eliminated, but it can be managed. Some moves to consider include:

Diversify Holdings with Higher-Yielding Bonds

Corporate bonds or mortgage-backed bonds are typically less sensitive to interest rate changes than Treasuries, and thus can diversify your bond portfolio. But keep in mind that higher-yielding bonds are typically riskier than Treasuries and include exposure to credit risk.

Focus on Shorter-Duration Bonds

Duration, expressed in years, is a key measure of a bond fund's sensitivity to interest rate changes. The longer the duration, the more a bond's value will rise or fall with changes in market interest rates. Investing in shorter-duration bonds or funds when interest rates rise may help limit price declines.

Using Duration as a Guide to Measure Interest Rate Risk

While knowing the duration of your portfolio is good, our investment professionals believe it’s beneficial to have duration reflect your investment time frame. The nearer you are to your goal, and/or the more sensitive you are to potential changes in the value of your portfolio, the shorter your duration likely should be.

If Your Time Horizon Is Approximately Three Years

Consider our shorter-duration portfolios:

If Your Time Horizon Is Longer Than Three Years

You may be willing to accept a higher degree of interest rate risk for higher potential rewards. However, if your goals are more long term, we believe intermediate-term, core diversified fixed income holdings may be a good option.

We offer several funds with an intermediate duration. You may want to consider:

If Your Time Horizon Is Approximately Three Years

Consider our shorter-duration portfolios:

If Your Time Horizon Is Longer Than Three Years

You may be willing to accept a higher degree of interest rate risk for higher potential rewards. However, if your goals are more long term, we believe intermediate-term, core diversified fixed income holdings may be a good option.

We offer several funds with an intermediate duration. You may want to consider:

The table below shows the current duration of American Century Investments® line of bond funds. If you feel like the duration of your bond fund or your portfolio is not aligned with your investing time frame, call us and we can help you evaluate your situation.

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1

Fund shares are not guaranteed by the U.S. Government.

2

The lower rated securities in which the fund invests are subject to greater credit risk, default risk and liquidity risk.

3

International investing involves special risks, such as political instability and currency fluctuations.

4

Investment income may be subject to certain state and local taxes and, depending on your tax status, the federal alternative minimum tax (AMT). Capital gains are not exempt from state and federal income tax.

5

The prospectus contains very important information about the characteristics of the underlying securities and potential tax implications of owning these funds.

6

Although you can potentially earn a dependable return if you hold your shares to maturity, you should be prepared for dramatic price fluctuations which may result in significant gains or losses if sold prior to maturity.

7,8

Because the fund invests primarily in California municipal securities and securities issued by U.S. territories, its yield and share price will be affected by political and economic developments within the state and territories.

There is no guarantee that all of the fund's income will be exempt from federal or state or local income taxes. The portfolio managers are permitted to invest up to 20% of the fund's assets in debt securities with interest payments that are subject to federal income tax, California state or local income tax and/or the federal alternative minimum tax.

9

Investment returns are exempt from Federal taxes.

10

International investing involves special risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks.

One of the best ways to prepare for all market conditions is to have a fully diversified portfolio.

We have professionally managed, diversified portfolios that may be a solution. Consider our time-based and risk-based asset allocation portfolios that combine stock, bond and short-term investments in a single fund—and include a mix of investments that help mitigate interest rate risk.

More Resources for You

What about inflation risk? Learn about staying ahead of inflation.

Get the latest views on interest rates and the bond market from our fixed-income experts.

Ready To Combat Rising Interest Rates?

We can help you deal with the impact of rising interest rates on your portfolio.

Call 888-345-2441

You should consider the fund's investment objectives, risks, charges and expenses carefully before you invest. The fund's prospectus or summary prospectus, which can be obtained by calling 1.800.345.2021, contains this and other information about the fund, and should be read carefully before investing. Investments are subject to market risk.

A One Choice Target Date Portfolio's target date is the approximate year when investors plan to retire or start withdrawing their money. The principal value of the investment is not guaranteed at any time, including at the target date.

Each target-date One Choice Target Date Portfolio seeks the highest total return consistent with American Century Investments' proprietary asset mix. Over time, the asset mix and weightings are adjusted to be more conservative. In general, as the target year approaches, the portfolio's allocation becomes more conservative by decreasing the allocation to stocks and increasing the allocation to bonds and cash equivalents.

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

The prospectus contains very important information about the characteristics of the underlying security and potential tax implications of owning this fund.

Investments in fixed income securities are subject to the risks associated with debt securities including credit, price and interest rate risk.

Generally, as interest rates rise, the value of the securities held in the fund will decline. The opposite is true when interest rates decline.

Fund shares are not guaranteed by the U.S. Government.

As with all investments, there are risks of fluctuating prices, uncertainty of dividends, rates of return and yields. Current and future holdings are subject to market risk and will fluctuate in value.

Diversification does not assure a profit nor does it protect against loss of principal.

Duration, which is an indication of the relative sensitivity of a security's market value to changes in interest rates, is based upon the aggregate of the present value of all principal and interest payments to be received, discounted at the current market rate of interest and expressed in years. The longer the weighted average duration of the fund's portfolio, the more sensitive its market value is to interest rate fluctuations. Duration is different from maturity in that it attempts to measure the interest rate sensitivity of a security, as opposed to its expected final maturity.