No. of Recommendations: 0
"This may be true, but the fund's yield will also increase accordingly. Then, after this drop in NAV, as older low yield bonds mature and are replaced with new higher yield bonds, the fund's yield will continue to increase until after interest rates stop rising. If you are reinvesting the dividend, it will keep your total investment value nearly constant."

Russ,

I'm not sure what your mean by "nearly" constant, but it is basic arithmetic that, as long as interest rates have risen above your initial NAV purchase price, the drop in NAV will be more than any gain from higher interest rates, even with reinvested dividends, at least until after you have held until the "average duration" period has passed. In other words, your total return will be less than the inital yield on the fund when you bought your shares. How much less, or whether you might end up with a loss, depends on how much rates go up and what the duration on the fund is.
Print the post  

Announcements

When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement