http://www.bogleheads.org/wiki/Bonds:_Advanced_Topics
I've attempted to show this concept in graphical form in the attached chart. This is a hypothetical example only.
I'd be interested in any comments and if you think this analysis is correct.
The chart shows a bond fund starting out with a yield of 2%. The yield increases by 1% in January 2016, January 2018, and January 2020. Duration of the fund was assumed to be 5.5 years, and the NAV was dropped just slightly under 5.5% following each rate increase.
The lines associated with the three higher interest rates cross the 2% line in July 2021, July 2022, and July 2023. The Point of Indifference does come out very close to 5.5 years after a single rate increase. The combined Point of Indifference for all three rate increases is about 7.5 years.
