Bond Funds

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Topic Author
LarryCarell
Posts: 95
Joined: Mon Jun 15, 2020 5:58 pm

Bond Funds

Post by LarryCarell »

Dear Bogleheads,

For example if I decide to invest in Vanguard Short-Term Corporate Bond ETF (VCSH), and after that interest rate goes up by 2%, what will happen to NAV? And also will I see my SEC yield increase? How fast?


Thanks

Vanguard Short-Term Corporate Bond ETF (VCSH)
Average effective maturity
3.1 years
Average duration
2.8 years
Yield to maturity
1.2%
Van
Posts: 761
Joined: Wed Oct 27, 2010 9:24 am

Re: Bond Funds

Post by Van »

As I understand it, your NAV will decrease by 2 X the duration, 5.6%. The SEC yield will go up, but I don't know by exactly how much, nor do I know the time frame. Perhaps, one of the bond gurus will be able to give you a better answer.
dbr
Posts: 33842
Joined: Sun Mar 04, 2007 9:50 am

Re: Bond Funds

Post by dbr »

As above ^^ I suggest reading here: https://www.bogleheads.org/wiki/Bonds:_advanced_topics

I don't know the answer about SEC yield.
User avatar
arcticpineapplecorp.
Posts: 6213
Joined: Tue Mar 06, 2012 9:22 pm

Re: Bond Funds

Post by arcticpineapplecorp. »

Duration has another useful summary property, which is that if the yield curve shifts in parallel[note 1], then duration is the point of indifference to interest rate changes. For example, if a bond/portfolio/fund with a duration of 5 years experiences a market interest rate increase of 1%, its value will drop by approximately 5%; however, since the same coupon payment now represents a higher percentage of the bond's value, its yield is higher (it will match the market rate), and the higher yield plus higher market interest on coupon payments compensate for the NAV loss. Thus duration represents the length of time it would take for the total value of the fund, with dividends reinvested, to be worth exactly what it would have been worth had interest rates not risen. To be absolutely assured of receiving a given sum on a future date (assuming parallel shifts of the yield curve), therefore, you should gradually reduce the duration as the date approaches. A zero-coupon bond reduces duration by exactly the amount of time that passes, and is therefore the risk-less choice for meeting a future obligation. However, few investors have such exact demands on their capital. For most purposes, shifting from intermediate- or longer-term bonds to shorter-term bonds as the need for capital approaches will cause little risk; also, in practice non-parallel shifts of the yield curve are not likely to cause very large changes in returns.

https://www.bogleheads.org/wiki/Bonds:_advanced_topics
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
Topic Author
LarryCarell
Posts: 95
Joined: Mon Jun 15, 2020 5:58 pm

Re: Bond Funds

Post by LarryCarell »

arcticpineapplecorp. wrote: Fri Jul 17, 2020 3:15 pm
Duration has another useful summary property, which is that if the yield curve shifts in parallel[note 1], then duration is the point of indifference to interest rate changes. For example, if a bond/portfolio/fund with a duration of 5 years experiences a market interest rate increase of 1%, its value will drop by approximately 5%; however, since the same coupon payment now represents a higher percentage of the bond's value, its yield is higher (it will match the market rate), and the higher yield plus higher market interest on coupon payments compensate for the NAV loss. Thus duration represents the length of time it would take for the total value of the fund, with dividends reinvested, to be worth exactly what it would have been worth had interest rates not risen. To be absolutely assured of receiving a given sum on a future date (assuming parallel shifts of the yield curve), therefore, you should gradually reduce the duration as the date approaches. A zero-coupon bond reduces duration by exactly the amount of time that passes, and is therefore the risk-less choice for meeting a future obligation. However, few investors have such exact demands on their capital. For most purposes, shifting from intermediate- or longer-term bonds to shorter-term bonds as the need for capital approaches will cause little risk; also, in practice non-parallel shifts of the yield curve are not likely to cause very large changes in returns.

https://www.bogleheads.org/wiki/Bonds:_advanced_topics
dbr wrote: Fri Jul 17, 2020 3:05 pm As above ^^ I suggest reading here: https://www.bogleheads.org/wiki/Bonds:_advanced_topics

I don't know the answer about SEC yield.

That article helped a lot! Thank you!
Van wrote: Fri Jul 17, 2020 2:27 pm As I understand it, your NAV will decrease by 2 X the duration, 5.6%. The SEC yield will go up, but I don't know by exactly how much, nor do I know the time frame. Perhaps, one of the bond gurus will be able to give you a better answer.

Thats correct, i think! Thanks!
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