Q. What will happen to a bond fund if rates rise?
A. The answer hinges on two metrics of a bond fund - its duration and yield.
Yield is straightforward, we will explain what is Duration below.
Duration
Duration measures a bond fund's interest-rate sensitivity. We all know if interest rate goes up, bond price does down. Duration measures the extent a bond fund's fall if the rate goes up. For example, a duration of 3 years means if the interest rate goes up by 1%, the bond's net asset value will suffer a 3% drop.
A good proxy of a bond's one-year return is its Yield - Duration. So if a bond fund's yield is 2.5%, its duration is 3, then you will likely see a -0.5% annual return.
Where to find a bond fund's Yield
Enter the bond fund's symbol in Yahoo Finance, you can get its Yield information.
Where to find a bond fund's Duration
It depends on which broker you use. For example, if you use Fidelity, after entering the fund's symbol, go to the Summary page, you can find a bond's Duration at the right section of that page.
A. The answer hinges on two metrics of a bond fund - its duration and yield.
Yield is straightforward, we will explain what is Duration below.
Duration
Duration measures a bond fund's interest-rate sensitivity. We all know if interest rate goes up, bond price does down. Duration measures the extent a bond fund's fall if the rate goes up. For example, a duration of 3 years means if the interest rate goes up by 1%, the bond's net asset value will suffer a 3% drop.
A good proxy of a bond's one-year return is its Yield - Duration. So if a bond fund's yield is 2.5%, its duration is 3, then you will likely see a -0.5% annual return.
Where to find a bond fund's Yield
Enter the bond fund's symbol in Yahoo Finance, you can get its Yield information.
Where to find a bond fund's Duration
It depends on which broker you use. For example, if you use Fidelity, after entering the fund's symbol, go to the Summary page, you can find a bond's Duration at the right section of that page.
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