Just trying to learn something.
I understand that if I have a bond or a bond ladder, I can pretty much ignore the ups and downs of the value of the bonds based on interest rate changes. Assuming that I ignore the possibility of default, if I hold the bonds to maturity, I will get the principle back plus the agreed upon interest.
Seems pretty safe and easy to match my need for the money with my timeframe.
What I don't understand are bond funds. I have heard people say that a bond fund is like a bond ladder of the same maturity but I don't see how.
Let's say I get an intermediate term bond fund with an average duration of 10 years. I presume as the bonds age that the bond fund doesn't hold these bonds to maturity (or do they?). If I have an intermediate term bond fund it would seem to me that as bonds get closer to maturity they probably have to sell those bonds to buy new ones to keep with the attributes of the fund. Seems to me then that they are pretty tied to interest rates since at the time they are buying or selling the cost they pay will depend on the interest rates that exist at that time.
If I buy and hold a bond fund until I need the money how does the fund give me similar characteristics to actually buying a bond or ladder?
So if I need $10,000 in 10 years. I could buy a $10000 bond and with interest I could pretty much be guaranteed to get $10,000 in 10 years plus some interest along the way.
If I buy $10,000 in a bond fund that has a 10 year average duration, it seems to me that what I will have in 10 years depends on the prevalent interest rates at the time I sell and the movements of interest rates over that 10 year period.
Would I have to be the one to sell my intermediate term bond fund to buy a short term bond fund as time moves forward towards that 10 year period?
What am I missing? Does the varying interest along the way make up the difference?
Thanks for your insight.
I understand that if I have a bond or a bond ladder, I can pretty much ignore the ups and downs of the value of the bonds based on interest rate changes. Assuming that I ignore the possibility of default, if I hold the bonds to maturity, I will get the principle back plus the agreed upon interest.
Seems pretty safe and easy to match my need for the money with my timeframe.
What I don't understand are bond funds. I have heard people say that a bond fund is like a bond ladder of the same maturity but I don't see how.
Let's say I get an intermediate term bond fund with an average duration of 10 years. I presume as the bonds age that the bond fund doesn't hold these bonds to maturity (or do they?). If I have an intermediate term bond fund it would seem to me that as bonds get closer to maturity they probably have to sell those bonds to buy new ones to keep with the attributes of the fund. Seems to me then that they are pretty tied to interest rates since at the time they are buying or selling the cost they pay will depend on the interest rates that exist at that time.
If I buy and hold a bond fund until I need the money how does the fund give me similar characteristics to actually buying a bond or ladder?
So if I need $10,000 in 10 years. I could buy a $10000 bond and with interest I could pretty much be guaranteed to get $10,000 in 10 years plus some interest along the way.
If I buy $10,000 in a bond fund that has a 10 year average duration, it seems to me that what I will have in 10 years depends on the prevalent interest rates at the time I sell and the movements of interest rates over that 10 year period.
Would I have to be the one to sell my intermediate term bond fund to buy a short term bond fund as time moves forward towards that 10 year period?
What am I missing? Does the varying interest along the way make up the difference?
Thanks for your insight.
Statistics: Posted by lvswts — Thu Aug 29, 2024 3:16 pm — Replies 0 — Views 30