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Subject: Re: Beginner's Qs on Bonds  Date: 7/15/2004 11:25 AM 
Author: jbking  Number: 10464 of 35909 
Greetings CMW, 1) What's the economic difference between a longterm, intermediateterm, shortterm, or full bond market index fund? The term refers to how long the bond will be around assuming it isn't called. Longterm bonds are usually 2030 years in length, intermediate is shorter like 710 and shortterm is 23 roughly. Typically, the longer the term the more sensitive the bond will be to interest rate shifts as if rates go up 1% this means more if the bond isn't maturing for another 20 years compared to a bond maturing in another year or two so shorterterm is usually less volitile. A full bond market index fund will hold bonds of all maturities and thus has a mix of short, intermediate and long which should make it move like an intermediate with a bit more kick but that is just a guess from my part. 2) This is what I found under the section marked "Risk Attributes" Historic Volatility Measures as of 05/31/2004 Benchmark Rsquared* Beta* Lehman Long Government/Credit Index 1.00 0.99 Lehman Brothers Aggregate Bond Index 0.93 2.17 *Rsquared and beta are calculated from trailing 36month fund returns relative to the associated benchmark. What do R squred and beta mean? Definition time from M*: RSquared vs. Standard Index Rsquared ranges from 0 to 100 and reflects the percentage of a fund's movements that are explained by movements in its benchmark index. An Rsquared of 100 means that all movements of a fund are completely explained by movements in the index. Thus, index funds that invest only in S&P 500 stocks will have an Rsquared very close to 100. Conversely, a low Rsquared indicates that very few of the fund's movements are explained by movements in its benchmark index. An Rsquared measure of 35, for example, means that only 35% of the fund's movements can be explained by movements in its benchmark index. Therefore, Rsquared can be used to ascertain the significance of a particular beta or alpha. Generally, a higher Rsquared will indicate a more useful beta figure. If the Rsquared is lower, then the beta is less relevant to the fund's performance. Beta vs. Standard Index Beta, a component of Modern Portfolio Theory statistics, is a measure of a fund's sensitivity to market movements. It measures the relationship between a fund's excess return over Tbills and the excess return of the benchmark index. Equity funds are compared with the S&P 500 index; bond funds are compared with the Lehman Brothers Aggregate Bond index. Morningstar calculates beta using the same regression equation as the one used for alpha, which regresses excess return for the fund against excess return for the index. This approach differs slightly from other methodologies that rely on a regression of raw returns. By definition, the beta of the benchmark (in this case, an index) is 1.00. Accordingly, a fund with a 1.10 beta has performed 10% better than its benchmark indexafter deducting the Tbill ratethan the index in up markets and 10% worse in down markets, assuming all other factors remain constant. Conversely, a beta of 0.85 indicates that the fund has performed 15% worse than the index in up markets and 15% better in down markets. A low beta does not imply that the fund has a low level of volatility, though; rather, a low beta means only that the funds marketrelated risk is low. A specialty fund that invests primarily in gold, for example, will often have a low beta (and a low Rsquared), relative to the S&P 500 index, as its performance is tied more closely to the price of gold and goldmining stocks than to the overall stock market. Thus, though the specialty fund might fluctuate wildly because of rapid changes in gold prices, its beta relative to the S&P may remain low. It seems to measure how closely this fund tracks with a given benchmark. Is that right? That's pretty close. Rsquared is how much of the movements of the fund can be attributed to the index while beta is what multiplier it should have if one did a linear regression on the returns. Why is it important to my investment decision? Because you may want to know how well a fund follows a benchmark if you want to try to get different asset classes. It doesn't make a lot of sense to buy a smallcap fund if it behaves just like a largecap fund, if you want a somewhat extreme example here. Beta is sometimes used as a risk measurement where some like lots of volitility and others want it as low as possible. 3) Could you recommend links/readings/etc. that would bring me up to speed on investing in bonds. Here are a few ideas: http://boards.fool.com/Message.asp?mid=18128614&sort=whole http://www.investinginbonds.c 