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Subject:  Re: Vanguard Talk on Bond Fund NAVs Date:  6/9/2004  5:52 PM
Author:  jbking Number:  10264 of 36039

Greetings amateur,

Here is my best guess at some answers:

Suppose today I buy 10 year treasury bond worth 10K yielding 4.8%. Does this mean

1) As long as the bond price doesn't change, I will get $480/year.

No, you'll get $480/year as long as the bond isn't called away. This may be a rare thing but I think there is a possibility for the Treasury to buy back bonds that are outstanding.

2) Suppose the bond loses its value and it is now worth 9K, but the yield is 6%. Does this mean I will get interest payment of $600/year?

I don't see how that can happen on one level. I could see the bond becoming worth 9K and then the yield will be 5.3% as you'll still get $480/year so that as the price goes down the yield goes up. This is an inverse relationship as the coupons from the bond don't change if we are talking about a vanilla Treasury.

Now if this is a TIPS then the principal will fluctuate and the coupon payment as a dollar amount but not the percentage and this is what can make an inflation-indexed treasury bond(which is what a TIPS is) attractive in some situations. In the case of an inflation-indexed bond, the principal is adjusted every 6 months based on CPI figures so that if that goes up then the face value of the bond goes up though the coupon rate stays the same the dollar amount may also go up. For more, take a look at for one starting point.

3) Also no matter what the yield is on maturity, will I get back my principle 10K?

Yes, assuming the treasury still exists at maturity. If the government goes ka-bluie then this may not necessarily happen.

What is the good source for a newbie to learn the basics of bond investing?

A couple of starting points:

Another idea for bond fund basics would be something like "Mutual Funds for Dummies" by Eric Tyson which has some good stuff.

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