No. of Recommendations: 4
blacktreechaser,

You wrote, In the article, page C7, today (Wednesday), is says if interest rates rise 1%, an intermediate term fund might lose 4.7%, and a long term bond fund might lose 9.4% in value.

I didn't read the article. I'm sure there is a big standard deviation in the above figures.....oh, and it quotes Morningstar for those numbers.


Most bond funds quote how much they would gain or loose by a one percent change in interest rates on their website, in their prospectus and their tear sheets. The number quoted is called their "average duration."

For instance, the Vanguard Intermediate-Term Bond ETF (BIV) has an average duration of 6.4 years. This means a 1% rise in rates should cause a 6.4% drop in NAV. The Vanguard Long-Term Bond ETF (BLV) has a duration of 13.4 years, so the NAV should fall 13.4% with a 1% rise in rates.

Vanguard's open-ended bond funds quote duration in the same way.

Like any other purchase, you should assess your risks when purchasing any bond fund. When assessing your interest rate risk, you can multiply the duration of the fund by your personal projection of interest rate movements within your investment horizon and use that number to adjust your YTM to determine whether or not the holdings make sense. Of course bear in mind that current yield will also rise during that same holding period effectively giving you a return of capital (if the NAV when down) in the form of interest payments.

Of course purchasing a long bond fund today doesn't seem to make any sense ... but then most bond products today hardly seem to provide enough yield to justify holding them. Certainly I'm buying nothing new and selling some of my preferreds has been tempting in recent markets.

- Joel
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