A bond fund resembles a floating rate perpetuity, Its dividends will reflect the average coupon of its holdings. As the fund is periodically rebalanced towards its target duration the average coupon of its holdings will change, rising when rates go up and vice versa, This is couterbalanced by the falling prices of the bond portfolio due to higher rates. Which of these two effects predominate at a certain time depends on the coupons carried by the bonds and on the extent of the change in rates, Therefore the return on the fund is mostly uncertain for a planned horizon.
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A bond fund resembles a floating rate perpetuity, Its dividends will reflect the average coupon of its holdings. As the fund is periodically rebalanced towards its target duration the average coupon of its holdings will change, rising when rates go up and vice versa, This is couterbalanced by the falling prices of the bond portfolio due to higher rates. Which of these two effects predominate at a certain time depends on the coupons carried by the bonds and on the extent of the change in rates, Therefore the return on the fund is mostly uncertain for a planned horizon.
Post: Bonds or Bond Funds?
Link to comment from October 30, 2024