r/investing Apr 22, 03:58 AM
When interest rates go down, a bond fund's interest payments should decrease with time, and the value of the fund goes up, but it should go down slowly with time also. When interest rates go down, a bond fund's interest payments should decrease with time, and the value of the fund goes up, but it should go down slowly with time also, and vice-versa.
My logic is this:
when interest rates go down, we all know that the bond fund's value goes up. Let's say that the rates are in steady-state and is stable. The fund manager continues buying new bonds, but these bonds have a lower interest rate, so the interest rates of these funds go down with the older issue bonds retiring. When the older bonds retire, the funds from these older bonds are reinvested in newer bonds with a lower rate at the same nominal value as the older bond. However, the interest payments will go down.
Also, after the rate goes down, the fund value goes up. We know this. But as the older bonds in that fund expires, the money from the nominal value of these bonds get reinvested in newer bonds at par value (at $1,000 or so). So even with time, the fund value also gets lower and lower with time.
Is this how bond funds behave?
submitted by /u/No-Silver826
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