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I'm looking at an example bond ETF which track bonds that expire on 2027 which means its for almost 10 years to its intermediate-term bond tracking.
I understand that if interest rate would go up, bonds especially long-term would go down.
I don't understand
How can I estimate or how to expect the above example ETF value to go down if the interest rate goes up? what is the process to estimate that for the above example bond?
Thanks
The key measure you are looking for is the effective duration of the fund. The effective duration of the fund indicates how much the value of the fund will change with every 1% change in interest rates. The longer the duration, the more sensitive the fund (or bond) is to interest rate changes.
For the bond fund you quote, today the effective duration is 7.32 years. So a 1% increase in interest rates would cause a 7.32% decrease in the fund value.
Note that this is a broad estimation. Bonds (and funds) also have convexity, which indicates how much that change accelerates (or decelerates) with larger interest rate changes. Also, interest rates do not always change in parallel. Meaning 10-year rates might change differently than 1-year rates, but both affect the overall value of the bonds. But duration should give you a rough estimate of the sensitivity to interest rates.
You would need to see the weight of each position in the fund. Then you just calculate the price change of each bond and calculate according to weight.
Formula for each bond i attached from investopedia
