To understand how interest rates affect your Savings Plan investments, you need to understand how each fund invests your money. In general, the available options can be grouped into three classes: stable value funds for capital preservation, bonds for income and stocks for growth.
Stable Value Funds
Cash equivalents are very high-quality securities that mature in three months or less and are liquid (easily converted into cash). Current interest rates largely determine the amount paid by the borrower on cash equivalents such as certificates of deposit (CDs), Treasury bills, commercial paper, and other very liquid, low-risk investments.
The Stable Value Fund, offered in the Savings Plan, is designed to preserve your investment principal and earn a predictable rate of return. It is comprised of a wide range of fixed-income securities that mature, on average, in three to four years. The fund’s portfolio is diversified among U.S. government and federal agency securities, short-term bonds, and cash equivalents, and includes investment contracts issued by insurance companies and banks.
A bond is an obligation to repay a debt, issued by a government or corporation. If you invest in—or purchase—bonds, you lend money to the issuer who, in return, typically promises to make regular interest payments with full repayment on a specific date in the future (the maturity date).
Changes in interest rates generally affect price movements for bond investments. Bond prices tend to move in the opposite direction of interest rates. In other words, when interest rates fall, bond prices rise. So, during economic slowdowns, bonds tend to perform well because the Federal Reserve generally lowers short-term interest rates to stimulate the economy.
The U.S. Fixed Income Fund, offered in the Savings Plan, invests in a wide range of fixed-income securities that mature, on average, in eight to 10 years.
Stock funds purchase ownership, called “equity,” in a variety of companies. They seek to make money by sharing in the different companies’ profits (in the form of cash dividends) or through capital appreciation (increase in stock prices)
When bond rates go up (as described above, bond rates are generally tied to interest rates), stock returns generally go down. This is because when rates on bonds, which are very low risk, are high, many investors pull their money out of stocks to invest in bonds. Conversely, when bond rates go down, investors tend to invest more heavily in stocks in order to maximize their return on investment.
Stock funds available in the Savings Plan include:
· Balanced Fund
· U.S. Equity Fund
· International Equity Fund
· Small Cap Fund
· Emerging Markets Equity Fund
· Northrop Grumman Stock Fund
This Investment Corner includes links to tools and information provided by organizations that are not associated or affiliated with Northrop Grumman. The tools and information provided by these organizations are not the property of Northrop Grumman, and Northrop Grumman is not responsible for their accuracy, completeness, or continued availability. You are solely responsible for the investment and asset allocation decisions you make pertaining to your personal savings and investments, including investments in the Northrop Grumman Savings Plan, Financial Security and Savings Program, and any other savings plans sponsored by Northrop Grumman