Postby **Indyxc** » Tue Dec 29, 2015 7:21 pm

Hello all,

Thanks for the feedback. Yes, I understand bonds (or at least I think I do lol), perhaps I am being unclear. Let me try to explain in more detail, and perhaps it may clarify, where I am confused.

So a regular bond. Let's say a 1 year bond, face value is $1000 dollars, and it pays 5%. At the end of the first year, I get my $1000 dollar principle back, plus $50 dollars in interest, so a total of $1050 back (or perhaps $25 every 6 months depending on the payment scheme). I understand that if yield went up or down during that span, the market price of the bond will be inverse to yield.

So onto bond ETFs. Bond ETFs are constantly buying more bonds to reflect their maturity level. Likewise, bonds are maturing constantly, etc.

My question is simple: Where does the interest/coupon collected from the bond etf go? I am assuming the returned principle from bond face value goes back to buy more of the same bond, but where is the interest go?

My bond etfs seem to work like this. Bond face value is $1000 dollars, and it pays 5%. So each month the interest is (50/12= $4.16). So, my bond ETF subtracts $1000-$4.16, and my new NAV is $995.84. So, they are essentially using my money to pay me back. This (50/12) shows up as a NAV LOSS every ex-dividend date on my statement. And my number of share DO not increase like the common stock dividen example. Meanwhile, the debtor (whose debt the BOND etf bought) is paying the bond etf back the 5% at the same time, so where is their money going?

Going back to my first example, the bond etf seems to work like this vs. the regular bond:

Bond face value is $1000 dollars, and it pays $5%. At the end of the year I get $50 dollars in interest, and $950 dollars in principle. Where did the %5 go?

Is the fund manager buying back the shares and making up the price of the net NAV loss? Or is the market price of the value of the bond return each month due to the dividend payment opportunity of the etf?

Thanks!