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Subject:  Re: GNMA Date:  12/15/2003  3:45 PM
Author:  Lokicious Number:  9044 of 36468

"If interest rates are up about 200 basis points in 5 years, I think your effective return over that period would be around 3-3.5%.

Can you shed some light on how you arrived at these figures?


Guesstimate. But the basic issue with the GNMA fund is the same as with other bond funds, if interest rates go up, the NAV will decline by an amount of change in basis points times average duration.

The problem with the GNMA fund is they don't tell you average duration, hence the need to make an educated guess. (Apparently, average duration is unreliable with GNMA.) But, as you say, the fund tracks the Total Bond fund pretty closely, so we can base an estimate on that. I haven't checked lately, but I think the durations are about 4, so the NAV would decline 8% if interest rates go up 2000 basis points. Divide by 5, you get 1.5% annualized decline in NAV. Subtract from current yield, add a smidgen for increased yield averaged over the 5 years, and 3-3.5% is ballpark. Maybe a little on the high side.

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