There is a passage from The Intelligent Investor that I'm trying to understand. It talks about companies refinancing high-grade bonds at more favorable rates for them.

My question is about the bold sentence.

  1. "As interest rates fell lower and lower" wouldn't the companies refinance again?
  2. Why did the bonds decline in the market? As interest rates lower, don't bonds go higher?

This is the text:

A tremendous amount of financing, consisting of the repayment of existing bonds at call price and their replacement by new issues with lower coupons, was done in the past. Most of this was in the category of high-grade bonds and preferred stocks. The buyers were largely financial institutions, amply qualified to protect their interests. Hence these offerings were carefully priced to meet the going rate for comparable issues, and high-powered salesmanship had little effect on the outcome. As interest rates fell lower and lower the buyers finally came to pay too high a price for these issues, and many of them later declined appreciably in the market. This is one aspect of the general tendency to sell new securities of all types when conditions are most favorable to the issuer; but in the case of first-quality issues the ill effects to the purchaser are likely to be unpleasant rather than serious.

Thank you so much for your help :)

2 Answers 2


Yes, bonds tend to rise as interest rates fall.

That was actually the problem being described.

As interest rates fell to incredibly low levels, everybody wanted to buy bonds. There started to be actual competition to buy bonds, with people willing to pay extremely high prices just to get their money out of interest bearing investments. This meant they were actually paying far over what the bonds were really worth. When people realized this bond prices went down - still priced higher than they were before interest rates dropped, but lower than they were.

  • I see! I managed to understand point 1 and 2 from here, so I'm picking your answer. My mistake was thinking that bonds could only depreciate as a result of higher interest rates -- thanks :) Dec 31, 2021 at 8:06

Bonds and interest rates have an inverse relationship. When the cost of borrowing rises, bond prices fall.

Most bonds pay a fixed rate. If interest rates rise, newly issued bonds have a higher coupon. This makes the earlier lower rate bonds unattractive so their price must decrease enough to match the same return as the newer bonds.

Conversely, if interest rates drop, a bond's yield becomes more attractive, driving up demand as well as the price of the bond.

Regarding U.S. preferred stocks, today, most of them are callable in 5 years. This gives companies the option to buy them back should rates drop and if so inclined, issue new ones with a smaller dividend. Due to our low interest rate environment, in recent years, this has been problematic for this niche because the number of issues available has declined dramatically and the majority of them are trading over par.

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