How much can I lost in bond fund

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vchiu25
Posts: 54
Joined: Sun Jul 01, 2012 7:38 pm

How much can I lost in bond fund

Post by vchiu25 »

I realized I don’t real understand bond fund at all.

It already dropped 12%. How high does interest rate need to get for it to drop another 10%?

What determines the price of vbmfx (vanguard total bond market)? Is it just interest rate or are there other factors?

Looking at vbmfx price looks like it’s hasn’t been this low since 1995. Does that mean market is anticipating interest rate to reach 1995 level?

If so, would rate have to increase beyond what it was in 1995 for vbmfx price to drop further? Or are there are factor that may cause it’s price to drop
Last edited by vchiu25 on Sat Sep 24, 2022 9:45 am, edited 3 times in total.
bloom2708
Posts: 9238
Joined: Wed Apr 02, 2014 2:08 pm

Re: Please help me understand bond fund

Post by bloom2708 »

Pretend there was only 1 bond in the fund.

$1,000 paying 2%

A new bond is issued paying 5% interest.

$1,000 paying 5%

You want to sell your bond paying 2%. Nobody will pay $1,000 for your 2% bond because they could buy the $1,000 bond paying 5%.

Your bond is really worth $900 (not the true amount, but for estimation in this example). Every existing bond is kept in parity with the "newest" bond being issued.

The bond fund holds thousands of bonds. Buying and selling, but in order to sell the old bonds, they are discounted to parity with the "newest" bond.

If rates keep rising, the bond funds can keep going down in value, BUT, the new bonds added pay more interest, so your interest payment is increasing.

Return = price change of bond fund + interest collected from bond fund.

If you only look at the first part, you are missing part of the picture. The duration of the bond, will determine how much interest rate changes will affect each bond.

What could reverse this trend? The economy tanks and interest rates start going down. Then the reverse happens.
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