With interest rates spiking unexpectedly in early 2018 and the Fed poised to continue raising interest rates throughout 2018, some bond investors have become very concerned about experiencing negative returns in their bond holdings. While rising rates will have a negative impact on the price return of a bond investment, this impact can be offset by the positive impact of coupon income.
A rising rate environment isn’t necessarily bad for bond investors in the long run because it will lead to higher coupon payments in the future. As interest rates rise, investors will demand higher coupon payments from newly issued bonds. Also, coupon payments from existing bonds can be reinvested in these newer, higher yielding bonds.