0

Source: In a rising interest rate world, ... own bonds or bond funds?, by Gail Bebee, 2013 Jul 2

Managing a bond portfolio takes work and is not feasible for smaller accounts. Consequently, many investors buy bond mutual funds or bond exchange-traded funds. These funds pay regular distributions. [1] When interest rates rise, fund net asset values fall to reflect the current value of the bond holdings. [2] Investors may never recover these losses because there is no maturity date when the holder is paid the bond’s face value.

Question 1: [1] is true exactly due to the inverse between bond prices and interest rates, right?

Question 2: Please explain [2]? Does it refer to bonds? If so, how can a bond lack a maturity ?

3

The claim is not exactly true. Not true at all, in fact.

That is correct that the bond prices fall when the rates go up. But it is incorrect that the fund members will not be able to recover their losses. The changes in fund prices merely reflect the changes in the value if the assets the funds hold. These assets do have maturity date and will be paid face value at that date. So the fund NAV will recover, and the fund value will reflect that recovery.

  • Except in the rare cases of consols or perpetual bonds – Pepone Mar 15 '15 at 15:43

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .