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​For over three decades, bond investors enjoyed unprecedented returns during a period of modest inflation and declining interest rates. A wakeup call for bond advocates appeared in the summer of 2013.

Summary

In the inaugural issue of the Abbot Downing client newsletter, we explore the effects of interest rate movements on bonds. We discuss the topic from several different angles, starting with the impact on family wealth management. Rising interest rates can bring concerns about bond prices but also offer the potential for economic growth. Planning ahead for interest rate changes and remaining nimble offers a strategic path to follow.

Next, we explore a unique opportunity that low interest rates bring – using an intra-family loan to help younger generation family members learn valuable financial lessons.

Finally, we take a quick look at how weather-related events impact investments. At the time of the newsletter’s publication, we were recovering from the polar vortex and energy prices in turn were affected. Even after a brutal winter, investors were able to find some bright spots.

KEY TAKEAWAYS

  • Interest rate movements not only affect the value of bonds in a portfolio but also the rate of interest paid for loans and financing.
  • While rising interest rates can be nerve-wracking for bond investors, there is an upside. The best approach to rising rates is to plan ahead to take advantage of potential opportunities.
  • As long as the interest rate on an intra-family loan exceeds a minimum published rate and the formalities of the loan are respected by both parties, no part of the loan will be treated as a gift. Periods of low interest rates make this an attractive option and create a “teachable moment."
  • Intra-family loans should be documented like any other commercial transaction to protect the integrity of the transaction and model responsible wealth stewardship.

Disclosures

Wells Fargo & Company and its affiliates do not render tax or legal advice.

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