Let's say for instance that I bought this TLH bond ETF with the following characteristics at the date I bought it:William Bernstein provides an insightful definition of duration as the "point of indifference" for the owner of a bond fund in dealing with interest rate changes. If interest rates rise after purchasing a bond fund, the NAV of the fund falls, which hurts the investor. However, the dividends that the bond fund throws off can now be reinvested at a higher rate. The duration is the length of time that an investor needs to hold the fund for the increased yields to compensate for the decrease in NAV. In that sense, 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.
- Average Yield to Maturity: 2.5%
- Weighted Avg Coupon: 2.2%
- Weighted Avg Maturity: 18 years
- Effective Duration: 14 years
- Let's pretend the ETF reinvest the dividends (I could not find a Treasury ETF on iShares website that reinvest the dividends on its own)
$100K x (1+ 2.5%)^14 ?
I'm ignoring defaults on US Treasury or other ominous extreme events, of course.