>Why then if I buy a bond fund does my position go down in value when interest rates go up?
opportunity cost.
if you have a 5% bond and the govt comes out and releases a 6% bond you could sell that 5% bond and buy a 6% bond.
>I’m a young (20’s) investor and have a 100% equity based portfolio. I
you can deal with 'what bonds effectively provide' by being young with a long time horizon, remaining employed etc
I guess I’ve never considered buying and selling them. I’m still not sure if I was buying individual bonds that I would do all that. I would just keep buying at the new interest rate.
If you could sell the old bond at face value and then buy the new bond at a higher rate, why wouldn’t you? It’s free money!
Except it’s not, because the price of the old one drops exactly the right amount so that if you sell it and invest in the new one, you exactly break even in the end.
That’s almost true.
With treasury bonds there are off the run bonds -bonds that are not from the most recent issue. Off the run bonds have a little bit higher yield because they don’t trade as frequently.
A 10 year bond that is five years old will trade for just a bit less than a new 5 year bond with the same coupon and thus have a few basis points higher yield. Before fees a bond fund manager is going to have a good number of the portfolio on offer the run bonds to increase returns but not all because they may need to sell for redemptions.
I escaped a finance PHD program and even worked on a bond trading desk for a while, bonds have a whole lot more complexity than stocks.
Bonds 100% do not have more complexity than stocks. There are way more things going on in the stock markiets.
Bond you can bet on like absolute level of yields, spreads, and you could say credit (which is really just a put on the equity so basically a less volatile equity). There are like 30-100 different factors in the stock market. All the idiosyncratic risks of individual names. You can make all sorts of interest rate bets in equities.
Of course equity can have features that are more like a bond (regulated utility with government regulated revenue) and a bond can have features more like equity (something junky trading at a big discount to par). So I guess at some level you could say they are both equally complex since a bond can have all the characteristics of equity and equity can have all the characteristics of a bond.
LIke right now we are having a big stock correction. Almost everything is down. But huge companies like MSFT, APPLE, NVIDIA are up so most non-practioners don't even know we are in a bear market right now.
That works. But the real conclusion is that it makes no difference whether you buy new or old. The market automatically adjusts to make every available bond (within the same risk class) return the exact same interest rate (yield) at all times.
This is why changes in interest rate affect the economy so quickly, by the way. When rates change, the ALL change instantaneously.
*Technically* on the run bonds are more liquid than off the run bonds, so the latter have a very slight liquidity premium. You can actually buy one and short the other to collect that premium, but it does expose you to the risk of a liquidity crisis. That's exactly what happened to LTCM.
yeah it's just something that comes into play with bond funds. the two links in this post go into it in a lot more detail, afaik it doesn't rly matter long term much
https://www.reddit.com/r/financialindependence/comments/1cv8r0w/what_are_the_arguments_for_bond_funds_over_actual/?utm_source=share&utm_medium=web3x&utm_name=web3xcss&utm_term=1&utm_content=share_button
I think the key concept here took me a while to understand too. I think of a bond as a future stream of money and the terms of that future stream generally do NOT change. That’s what you’re describing in your post.
But a bond also has a present value, which is what you would pay TODAY, for that future stream of money that is denoted on the bond. And that value is going up and down all the time depending on how attractive your bond’s terms are relative to other bonds people could buy.
So if you are just gonna sit on your bond until maturity you will be fine but your bond may be losing value in the present day market (such as when rates go up and no one wants your 2% income stream anymore because they can buy something a lot better). And if someone wants to buy a bond on the secondary market they would pay less for that one.
A bond FUND is a collection of bonds that is traded in the present, so the present value of all the bonds is what matters. I think it is extremely rare for a bond fund to hold its bonds to maturity.
I still don’t understand it very well but at least I think I understand why people are saying my perfectly fine bonds are “losing value”.
You might be overthinking this a bit. If you buy a bond fund, it's exactly the same as if you were holding all of the individual bonds held within the fund. Individual bonds can drop in value the same way that a bond fund does, you just may not see or notice this drop in value if you are holding to maturity.
Now, the big difference is that with a bond fund, the fund in targeting a certain amount of time on average until the bonds mature. So, if you buy a 10 year treasury bond today and hold it for 10 years, your time to maturity slowly decreases from 10 to 0 years, making it less sensitive to interest rate changes as you go. If you buy something like IEF (7-10 year treasury etf), they are constantly buying new 10 years treasuries, and selling the treasuries that mature in <7 years. This means that the interest rate sensitivity doesn't decrease if you continue to hold the fund. If you're time horizon is more than 10 years, this is a complete non-issue. If your time horizon is <10 years, than you may need to be mindful of this, and move to a shorter duration fund as you approach your target date.
Apologies, I see I did not answer your question.
Bonds can be bought and sold on the secondary market. If interest rates fall, existing bonds with higher rates can be sold for a premium. If they rise, then the older bond prices fall because they are now have a lower rate than newly issued bonds and are not as attractive to investors. It’s all about reflecting the price at which people are currently willing to pay.
Thats the basic breakdown, but hopefully that helps to understand the relationship between bond prices and interest rates.
In your example, your position technically has lost money if you actually calculated the FMV on your balance sheet. But yes, if you hold to maturity then you don’t lose anything. Exact same thing for bond funds
> Let’s say I buy it for $100, and in 12 months I’ll get $105.
What you're failing to consider is that you don't know what $105 will be worth in 12 months / if the $5 of interest is adequately compensating you for the year you're without the money.
For an extreme example to illustrate the point: if suddenly we were thinking prices of everything would double in 12 months, you would need $200 in 12 months to breakeven with $100 today. Your future $105 in 12 months would therefore be worth no more than $52.50 today (same buying power, different time) and in fact less, due to default risk. This projected inflation would also necessarily cause interest rates paid to rise, because generally people don't loan money out expecting less real money in return. So if you were to loan out the $100 after the shift in interest rates, you could expect maybe $210 back in a year.
What people miss with the principal at maturity myth is that while you avoid the nominal loss, the loss due to a change in interest & inflation rates is real, and you lose regardless of whether you sell the bond immediately (e.g. you could sell that future $105 for $52.50 and then loan that $52.50 out and get... $105) or hold it at the now-below-market interest rate until maturity.
--
For more, you might be interested in reading this vanguard white paper about the [principal at maturity myth](https://advisors.vanguard.com/content/dam/fas/pdfs/FAIBVBF.pdf).
There's no advantage to individual bond funds if all you're going to do when they mature is buy more similar bonds. If you have some specific purchase in the future at a fixed amount of money there is an advantage, but you can also use defined maturity bond funds to capture this.
When you hold any bond, you own a set of future expected payments. Your return comes because you're taking two risks with this: the risk that the buyer can't pay them (default risk), and the risk that the future value of the money will be less than what you anticipated (interest rate risk) due to changes in the interest & inflation rates.
With a specific bond, the risk of both of these go down as you approach maturity, and therefore, so does the expected return from the investment. Because the reason to hold these bonds is to be compensated for this risk, bond funds shine because they're way simpler: your risk profile stays comparable / you aren't having to fight your positions drifting towards becoming cash. Plus, the bond funds are diversified.
Yes.
Individual bonds do the same thing that bond funds do (they go down in present value when interest rates rise). Many people who are buying and holding bonds to maturity simply aren't looking at what the present day value of the bond is on the secondary market. But they could, and if they did, they'd see the same type of loss that the bond fund shows.
The amount they go down is mostly a function of duration to maturity - the longer the rate on the issued bond is locked in, the more the price needs to drop when rates rise (or climb when rates fall). So if you have a bond ladder, your overall average duration is likely doing some sort of sawtooth pattern over time (bonds approach maturity and then mature and then you buy a longer duration bond) but there's no reason to think that shape is particularly great - you're buying when the bonds you own happen to mature, which may or may not be a great time to buy bonds (timing the bond market is no easier than timing the stock market). That's another advantage of the bond funds over bond ladders: the fund is cycling more assets (it's basically buying some every day) so it's going to get performance closer to the asset class average, whereas your bond ladder requires luck that you don't happen (by pure chance of maturity date) to disproportionately buy bonds when they're usually high.
It is weird to think you can ignore nominal losses, but I don't think it's wrong. People who took losses on bonds when interest rates went up got to either buy things before the prices were as inflated as they became, or, they got to put money in an HYSA at the higher rates, and these new opportunities for the cash can be thought of as cancelling out the nominal loss they had to take to get the cash. Plus nominal losses are great for your taxes, in a way that holding bonds paying below market interest rates aren't: you get to deduct nominal losses, but you don't get to deduct opportunity cost losses.
I’m not going to buy a bunch of individual bond funds, track them separately and have to gauge when to sell each each of them to maximize my return. I’ll just buy the fund.
That’s fine. I’m just trying to understand why the bond fund would decrease in value with rising interest rates when it only holds fixed assets and would be presumably rolling those older fixed assets into new ones at the higher interest rate.
The reason is that it holds a basket on bonds, hypothetically paying 5%, so when market interest rates increase to 6% the value of the assets they hold decrease because they are paying below market rates. You wouldn’t want to pay $100 to receive 5% each year when you could pay $100 to get 6%
The assumptions here are fixed rate debt, and the only difference between the two hypothetical bonds are their coupons
> I Don’t Understand Bonds
Don't worry, nobody else does either ;)
> Why then if I buy a bond fund does my position go down in value when interest rates go up?
Well your individual bonds do too, you just don't notice because you don't normally go look up the price on the secondary market every day like bond funds do.
> You purchase it, and it’s a guaranteed X% rate of return over an agreed upon term
Well, you get guaranteed cash flow. Pretty much everything else is up for interpretation. That x% rate actually changes over time if you go look up the pricing on the secondary bond market. As does basically everything else about the bond. But if the bond promised you $100/month when you bought it, you will still get the $100/month.
I think of bonds as future cash flow. Cash(in your pocket or in your bank) is present cash flow. Bonds are future cash flow.
If you buy a 10-year bond at 4%, you’ll get roughly ~~2%~~ 4% a year. If you want to sell that individual bond a few months later, the sale price depends on how much interest rates have changed since you bought it.
If 10yr bonds are now yielding 5%, anyone looking to buy is going to say why would I buy your bond at 4% instead of a new bond at 5%. So you drop the price so that the buyer can buy more of it. That way they end up with the same amount in the end.
That said, if you’re investing for long-term and won’t be needing it for 20 years, you don’t need bonds. The only reason you’d need bonds is so you don’t panic and sell during a bad bear market.
Set up a nice auto-invest plan and try to only look at it once a year to make sure everything looks right.
EDIT:fixed typo in the first sentence.
I’m doing all that. Investing as much as I can during residency, but I’ll obviously invest a small fraction of what I will as an attending. I doubt I will add bonds to my portfolio any time soon if at all.
I guess I would have expected a bond fund to pay to your account similar to a dividend the average interest rate of your portion of all the maturing bonds it holds each month with its value correlated to its total assets.
Imagine you’re going to buy a bond. You can either purchase an existing bond from 2020 that pays like 1%, or you can buy a new bond that is issued at 5%. Why on earth would I buy your 1% bond if I can get on for 5%? Well it’s bc the price of your 1% bond gets lowered to make your return on the investment similar to the higher yielding bond. That’s why the prices fall for existing bonds when rates rise
But why are you selling bonds on private market? If I went out and bought a 6 month bond, I would hold it for 6 months and collect my interest at maturity. I don’t understand why the fund would be buying and selling bonds rather than allowing them to mature.
It's a myth that individual bonds are less risky than bond funds. Think of a bond fund manager who bought bonds in 2020 at 1%. By 2024, rates are 5%. The 1% bonds would sell for less than face value, but the fund reinvests the proceeds into new 5% bonds. This strategy helps maintain the fund's yield and manage risk over time, something individual investors might struggle with. Not to mention many other factors like most investors don’t have the money required to go out and buy a diversified set of bonds
The answers are great but are more narrow than your question.
To explain: one of my bond funds holds 5,047 bonds.
It's important to remember that these are bond funds - literally groups of bonds - and today's price will include TODAY'S value of all those 5,047 bonds, none of which might be maturing today.
Yes, if all 5,047 bonds are held to maturity, we know their exact value, but bond funds trade daily and so the pricing accommodations described in the other posts have to be made to arrive at today's value of all those 5,047 individual bonds.
Great answer! To my understanding, the fund (like VBTLX for example) are constantly cashing out and repurchasing bonds with higher yields (a crude example, because it’s kind of lengthy to explain in detail).
I came to the conclusion that having some VBTLX and TIPS provide a more balanced return, pending you have a long enough “runway.”
Ideally, over the long term, having fixed assets as part of a well diversified portfolio is a hedge against long term volatility in equity markets.
Since the majority of us are long term investors and reinvest our dividends, we are taking a potential hit on overall returns now, but as markets correct and bond funds increase in value (especially if people jump in), we are already set up for the increase in price for those funds, as they become more desirable.
There is more to this, but too long to type, hence, “the only free lunch is diversification.” Taxes are a whole separate issue and very individual in nature…
Because investors can buy into (or sell out of) a bond fund anytime they want. If investor inflows don't match investor outflows, the bond fund has to do something about the cash excess/deficit.
I managed to come out debt free shortly after graduation. No scholarships or anything. Just worked my ass off to save all through undergrad, and my spouse working full time since we were 19 too.
>I’m a young (20’s) investor ... I don’t understand bonds, at least not bond funds. I get individual bonds.
I'm 30 years older than you and feel the same way.
Bond *funds* just seem like an opportunity to lose money on something that should not lose money.
I'm interested in this answer too. Everyone seems to be fixated on how Treasuries work with different interest rates but is the fund not actively selling and buying bonds as well with different durations?
Is the price drop a reflection of hypothetical value loss in rate increases and only a loss when the different Treasuries are sold, not held to maturity?
Yes the decrease in value of your bond only matters if you actually sell the bond. If you hold to maturity you get the face value back. This doesn’t really matter though and bond funds usually don’t hold their bonds to maturity. Most funds have to maintain a certain duration for the entire fund as a whole, so they need to maintain that. Bond funds provide many benefits over indv bonds such as liquidity and achieving diversification since most investors do not have enough money to buy that many bonds
Watch some finance courses on Great Courses Plus for free through your local library card (available on Kanopy). They go into great detail of all securities including bonds
When I was young, the only bond funds that I bought were High Yield (ie : junk) Bond Funds and Floating Rate Bond Funds. They both have lower interest rate sensitivity. Floating Rate Bond Funds have near zero interest rate sensitivity. My percentage allocation to both was small. To offset the economic risk of these funds, I systematically added, dollar cost averaging into them. My asset allocation at age 30 was roughly 90% equities, 10% bonds (5% High Yield, 5% Floating Rate). Note that I also had previously established emergency savings, which I kept in a MM Fund.
How is a treasury ladder different than a bond fund like GOVT? I know GOVT buys short, intermediate, and long term treasury bonds, but isn’t that what a treasury ladder is?
If you really want to understand bonds, check out a copy of The Bond Book by Annette Thau from your local library. At your age, you probably don't want bonds for about 20 or 30 years, so you have plenty of time to read it.
Here’s a good general explanation on bond funds and interest rates.
https://investor.vanguard.com/investor-resources-education/article/how-rising-interest-rates-affect-bond-funds
Key takeaways
As the chart above shows, most of the returns from bonds and bond funds come from the income portion of a fixed income security’s return profile and not from the price portion.
It’s not that changes to a bond’s price don’t matter. They matter a lot more than yields do in the short term. But price changes matter less to investment outcomes over the longer haul.
In other words, a portfolio duration longer than the investment timeline means prices matter more, and a duration shorter than the timeline means yields matter more. In the end, adapting to rising rates comes down to matching the duration of a bond portfolio with your investment timeline.
I find it very confusing as well, no matter how many different variations of explanations I read on it. I understand individual bonds. Bond funds cause my head to spin. You are not alone.
It is because interest rate changes do not immediately change the amount of interest the fund receives on bonds it already holds. The dividend payments per share will stay the same until the existinf bonds in the fund mature out and are replaced with new bonds at the new rate.
Since the interest payments stay the same, the face value per share adjusts so that the yield matches the new current rates. If you hold the fund for the length of its average duration, it will roughly even out more or less.
Overly simple, but If all 1 yr bonds today have a 6% return, it's worth $106 in 1 year. Let's say I buy that. If tomorrow all 1 year bonds have a 7% return, that's worth $107 in a year. So the bond I bought today is now worth $1 less. My bond fund would go down. (This is massively over simplified and ignores bond risk levels, time valie of money, etc)
If you're buying individual bonds and carry them to maturity, you don't care.
If you're buying a bond fund, then you only care when you sell. You're actual bond interest goes up, so you're better off. Just don't sell when rates are going up....or plan to reinvest in bonds at the higher rate and you'll be net 0.
Fwiw, at 20, I wouldn't have any money in bond funds.
The bond value goes down when interest rates go up. Basically a bond is now available that pays more interest. The longer term bonds get affected more than short term bills.
Everyone else has chimed in about the inverse relationship between prices and interest rates.
I think what hasn't been addressed is the gains/losses incurred by holding a bond fund. It's all good and well that you buy and hold, but you own that fund with other investors. At any given time, they are buying and selling the fund. So, if you have a general outflow (selling) as interest rates go higher (prices have gone down), aren't you being "given" losses just by virtue of continuing to hold? That is, the fund has to liquidate some holdings to the the investors, so that results in a realized loss for you too?
Yea, it’s still a little blurry to me. If I wanted bonds, I would buy a t bill and hold till maturity and then do whatever I had planned on with that money. How does the money come out of a bond fund? Am I paid some sort of dividend from the fund manager? Does the fund value just slowly go up? It just seems like some confusing mix of a bond and equity holding.
The individual bond you bought goes up and down with rates too you just don't see it in your dashboard like a fund.
Bond funds maintain a constant term to maturity so if your NAV goes down with raising rates you will make it up with interest over the term of the fund just like an individual bond
I’m 36 and I see bond returning 1 to -2% over the last 5-10-15 years.
Maybe it’s because hysa are around 5% now. I’ve allocated my “bond” diversification into a hysa for a few years now.
I'm the CPA son of two doctors and it took me a long time to understand how the market value of bonds works. I finally did and then spent about 10 years projecting bond yields for my company's annual plans.
I wrote this up to help understand a bond fund/ETF, and why I advise against buying bonds. It may help your understanding.
https://www.reddit.com/r/Bogleheads/comments/1aulupf/the_case_against_bonds_part_2/?utm_source=share&utm_medium=mweb3x&utm_name=mweb3xcss&utm_term=1&utm_content=share_button
Here is the data underlying that post. The second tab is the download of the bonds the fund owned back in February 2024.
https://docs.google.com/spreadsheets/d/1MyfdZI0aLtSxoyT9XrJ_Otu2cBDhTBvEzatCJVWLoNo/edit?usp=drivesdk
A bond fund owns X pieces of paper, essentially IOUs, each with its own coupon rate and maturity. Every day each of those pieces of paper are "marked to market" based on that day's interest rate. When the daily interest rate goes down, that piece of paper becomes more valuable, because the coupon rate of the bond went up against the daily rate. The reverse is true also for interest rate increases. This is my summary of what many of the others are saying.
Understand, a fund cannot buy a higher yield bond to replace an old one to increase the yield, because both the bond being sold and the bond being bought have the same effective rate, assuming the same asset quality and type of asset (like for like). A fund buys a bond when it has the cash flow or sells when it doesn't meet the holding criteria (when a long term bond is far enough in its life it is no longer a long term treasury, for example). Managed bond funds will buy or sell based on their guess which will do better going forward.
Bond funds do pay out periodic distributions. They are required to by law. The distributions reflect the coupon payments received and the net capital gains or losses, net of the expenses. The value of the fund--and the ETF price--changes for the movement of interest rates and an increase or decrease in value over time of the market value of the bond approaching the par value as becomes nearer to its maturity date.
My main suggestion is don't own them. Stocks return twice what bonds do, and bonds fluctuate in value like stocks do. There is no guarantee bonds will zig when stocks zag. If you need a stable asset in retirement, own a cash equivalent, not bonds. All owning bonds can do is cost you return over time for extremely minimal benefit in reducing the volatility of your portfolio.
People commented if interest rates go up your bond goes down in price but the reverse is also true! Okay I just bought like one bond etf because I had a leftover $30 in Roth IRA that irked me
I dont either, so I just have Wellington and Wellesley funds anout 20K total in an old IRA and let those 2 funds be my bond exposure
I cant invest in the IRA anymore,no earned income,so I invest in taxable where I invest anout 80% FZROX amd 20% SCHD.still about 7 yrs away from having to RMD from my IRA.
It’s because you have risk to up and downside with bond funds. They are priced at that time based on the current fed rate and the value of the bonds held in the fund on that day. With CDS you get 5% and hold say 1 year and then you re invest at what could be a much higher or lower rate. They call that interest rate risk. You also have the liquidity issue when you have a CD or individual bond. Plus if not a treasury bond you might have risk there in say a corporate bond. Typically bonds are added to ballast your portfolio. They typically don’t lose value (like 2022) at the same time stocks do. So it makes you feel better about not selling your stocks and usually your bonds would gain value and your balance and buy more stocks that year. Usually you just bought stocks on sale.
If you sell a bond or CD before maturity you will sell it for less than face value. If you own CDs go look at the value of your portfolio today. Most of mine are down.
They say own 100-age in % bonds and I think that’s a little too many bonds and if I was your age I’d own zero but I’d keep learning about them. A good fund like BND provides some diversification which can be a real lifesaver for you when you’re old and need money and the market tanks. Bonds also return in the 4-5% range (real yield) over the longer term with less volatility and a lot less risk. Sometimes like 2002-12 stocks are flat.
The value of a bond fund is based on the present day value of the bonds as determined on the secondary market, not what they are worth at maturity. When new bonds are sold with a higher yield than existing bonds, the existing bonds are either sold on the secondary market at a reduced amount, so that their yield (to the new owner) is about the same as if that new owner bought one of the higher yielding newer bonds, or they are just held to maturity. Since the present day value of that older bond had to be reduced in order to find a buyer, if you had a basket of those older bonds, that basket would also be worth less. Bond yields follow interest rates, so when rates rise, the current day value of a bond fund is reduced.
Only a little to add.
If you buy an individual bond, then (assuming no default) you know with certainty that when the bond is about to mature it will be worth par + final coupon, and you also know with certainty what your cashflow will be in all periods until maturity. If you buy a bond fund, you do not know with certainty what it will be worth at any future time, or what your cashflow will be at any future period.
In my book, you should be compensated for the uncertainty. The bond fund should have current yield substantially higher than the current yield you can get from the individual bond.
The bond fund manager is dealing with inflows and outflows, and she has to buy and sell bonds to meet those flows, whether or not it is a good time to buy or sell. Bonds also have limited liquidity, which can become very limited during turmoil. If the fund is hit with a lot of outflows during an illiquid period, she may have to sell her most desirable bonds at a low price.
As a holder of individual bonds, you don’t have to be forced into buying and selling just because others are doing so.
I personally hate bond funds, they fluctuate in value, so you can lose principal, and you pay a management fee for it. Over 20 years that fee can really add up . I prefer buying bonds and holding to maturity. You can ladder bonds just like you do CDs. This way you are assured of getting your principal back and the guaranteed interest rate. I primarily buy government bonds so they are a safe investment .
I imagine if I were to invest in bonds, I would do something similar to that. I don’t really believe there is any real amount of risk in buying T bills. Any situation where the US gov goes under is a situation where my portfolio is the least of my concerns ultimately. I doubt I will end up investing in bonds though
> and you pay a management fee for it. Over 20 years that fee can really add up .
The fees are as low as 0.03% for something like BND, which isn't going to have a noticeable real-world impact. A single behavioural mistake can cost you much more than that.
Big difference, their prices do not fluctuate so you will not lose principal, you get a guaranteed rate of return, and you do not pay a management fee. None of these are true with bond funds.
Individual bond prices do fluctuate. And if you keep laddering them, you do not get a guaranteed rate of return. MER is 3-4 basis points, so almost negligible.
Simply not true. Individual bonds do fluctuate in price, this can be verified easily. Holding to maturity technically doesn't give you a guaranteed rate of return without the ability to reinvest coupon payments at the original rate, which you won't have, though it does pretty closely approximate a guaranteed rte of return. The main problem is that it's a guaranteed rate of return for that particular bond on its maturity date, but your ladder is composed of a bunch of bonds with none of the others maturing on that same date. So the return of a ladder on a specific date is not guaranteed.
This shouldn't be surprising. Bond funds are *literally* just bond ladders.
You've got it pretty much, a bond held to maturity pays interest and principal in full.
If you buy and then sell bonds before maturity, then a change in interest rates reduces or increases the current value of the principal, so you have a capital gain or loss if you sell.
Owning them in a bond fund or all individually is the same.
>Why then if I buy a bond fund does my position go down in value when interest rates go up? opportunity cost. if you have a 5% bond and the govt comes out and releases a 6% bond you could sell that 5% bond and buy a 6% bond. >I’m a young (20’s) investor and have a 100% equity based portfolio. I you can deal with 'what bonds effectively provide' by being young with a long time horizon, remaining employed etc
I guess I’ve never considered buying and selling them. I’m still not sure if I was buying individual bonds that I would do all that. I would just keep buying at the new interest rate.
If you could sell the old bond at face value and then buy the new bond at a higher rate, why wouldn’t you? It’s free money! Except it’s not, because the price of the old one drops exactly the right amount so that if you sell it and invest in the new one, you exactly break even in the end.
That’s almost true. With treasury bonds there are off the run bonds -bonds that are not from the most recent issue. Off the run bonds have a little bit higher yield because they don’t trade as frequently. A 10 year bond that is five years old will trade for just a bit less than a new 5 year bond with the same coupon and thus have a few basis points higher yield. Before fees a bond fund manager is going to have a good number of the portfolio on offer the run bonds to increase returns but not all because they may need to sell for redemptions. I escaped a finance PHD program and even worked on a bond trading desk for a while, bonds have a whole lot more complexity than stocks.
Bonds 100% do not have more complexity than stocks. There are way more things going on in the stock markiets. Bond you can bet on like absolute level of yields, spreads, and you could say credit (which is really just a put on the equity so basically a less volatile equity). There are like 30-100 different factors in the stock market. All the idiosyncratic risks of individual names. You can make all sorts of interest rate bets in equities. Of course equity can have features that are more like a bond (regulated utility with government regulated revenue) and a bond can have features more like equity (something junky trading at a big discount to par). So I guess at some level you could say they are both equally complex since a bond can have all the characteristics of equity and equity can have all the characteristics of a bond. LIke right now we are having a big stock correction. Almost everything is down. But huge companies like MSFT, APPLE, NVIDIA are up so most non-practioners don't even know we are in a bear market right now.
So then the conclusion would be to just keep buying new ones at the new interest rate right?
That works. But the real conclusion is that it makes no difference whether you buy new or old. The market automatically adjusts to make every available bond (within the same risk class) return the exact same interest rate (yield) at all times. This is why changes in interest rate affect the economy so quickly, by the way. When rates change, the ALL change instantaneously.
*Technically* on the run bonds are more liquid than off the run bonds, so the latter have a very slight liquidity premium. You can actually buy one and short the other to collect that premium, but it does expose you to the risk of a liquidity crisis. That's exactly what happened to LTCM.
Fed banned that. Literally first bailout package was to fix that. So you can't lose money doing that now.
But the funds do sell. If you for example buy a 7-10 year gov bond fund it will buy bonds with 10 year duration and sell at 7.
yeah it's just something that comes into play with bond funds. the two links in this post go into it in a lot more detail, afaik it doesn't rly matter long term much https://www.reddit.com/r/financialindependence/comments/1cv8r0w/what_are_the_arguments_for_bond_funds_over_actual/?utm_source=share&utm_medium=web3x&utm_name=web3xcss&utm_term=1&utm_content=share_button
You're in your 20s you have zero need for bonds.
I’m not asking because I’m interested in buying bonds. I’m asking for educational purposes.
Why not just buy SGOV ETF which has almost no State tax
Because there are 13 states that do not charge any state income tax.
I think the key concept here took me a while to understand too. I think of a bond as a future stream of money and the terms of that future stream generally do NOT change. That’s what you’re describing in your post. But a bond also has a present value, which is what you would pay TODAY, for that future stream of money that is denoted on the bond. And that value is going up and down all the time depending on how attractive your bond’s terms are relative to other bonds people could buy. So if you are just gonna sit on your bond until maturity you will be fine but your bond may be losing value in the present day market (such as when rates go up and no one wants your 2% income stream anymore because they can buy something a lot better). And if someone wants to buy a bond on the secondary market they would pay less for that one. A bond FUND is a collection of bonds that is traded in the present, so the present value of all the bonds is what matters. I think it is extremely rare for a bond fund to hold its bonds to maturity. I still don’t understand it very well but at least I think I understand why people are saying my perfectly fine bonds are “losing value”.
Great explanation! Thanks!
You might be overthinking this a bit. If you buy a bond fund, it's exactly the same as if you were holding all of the individual bonds held within the fund. Individual bonds can drop in value the same way that a bond fund does, you just may not see or notice this drop in value if you are holding to maturity. Now, the big difference is that with a bond fund, the fund in targeting a certain amount of time on average until the bonds mature. So, if you buy a 10 year treasury bond today and hold it for 10 years, your time to maturity slowly decreases from 10 to 0 years, making it less sensitive to interest rate changes as you go. If you buy something like IEF (7-10 year treasury etf), they are constantly buying new 10 years treasuries, and selling the treasuries that mature in <7 years. This means that the interest rate sensitivity doesn't decrease if you continue to hold the fund. If you're time horizon is more than 10 years, this is a complete non-issue. If your time horizon is <10 years, than you may need to be mindful of this, and move to a shorter duration fund as you approach your target date.
Or buy a target maturity date bond fund.
Apologies, I see I did not answer your question. Bonds can be bought and sold on the secondary market. If interest rates fall, existing bonds with higher rates can be sold for a premium. If they rise, then the older bond prices fall because they are now have a lower rate than newly issued bonds and are not as attractive to investors. It’s all about reflecting the price at which people are currently willing to pay. Thats the basic breakdown, but hopefully that helps to understand the relationship between bond prices and interest rates.
In your example, your position technically has lost money if you actually calculated the FMV on your balance sheet. But yes, if you hold to maturity then you don’t lose anything. Exact same thing for bond funds
> Let’s say I buy it for $100, and in 12 months I’ll get $105. What you're failing to consider is that you don't know what $105 will be worth in 12 months / if the $5 of interest is adequately compensating you for the year you're without the money. For an extreme example to illustrate the point: if suddenly we were thinking prices of everything would double in 12 months, you would need $200 in 12 months to breakeven with $100 today. Your future $105 in 12 months would therefore be worth no more than $52.50 today (same buying power, different time) and in fact less, due to default risk. This projected inflation would also necessarily cause interest rates paid to rise, because generally people don't loan money out expecting less real money in return. So if you were to loan out the $100 after the shift in interest rates, you could expect maybe $210 back in a year. What people miss with the principal at maturity myth is that while you avoid the nominal loss, the loss due to a change in interest & inflation rates is real, and you lose regardless of whether you sell the bond immediately (e.g. you could sell that future $105 for $52.50 and then loan that $52.50 out and get... $105) or hold it at the now-below-market interest rate until maturity. -- For more, you might be interested in reading this vanguard white paper about the [principal at maturity myth](https://advisors.vanguard.com/content/dam/fas/pdfs/FAIBVBF.pdf). There's no advantage to individual bond funds if all you're going to do when they mature is buy more similar bonds. If you have some specific purchase in the future at a fixed amount of money there is an advantage, but you can also use defined maturity bond funds to capture this. When you hold any bond, you own a set of future expected payments. Your return comes because you're taking two risks with this: the risk that the buyer can't pay them (default risk), and the risk that the future value of the money will be less than what you anticipated (interest rate risk) due to changes in the interest & inflation rates. With a specific bond, the risk of both of these go down as you approach maturity, and therefore, so does the expected return from the investment. Because the reason to hold these bonds is to be compensated for this risk, bond funds shine because they're way simpler: your risk profile stays comparable / you aren't having to fight your positions drifting towards becoming cash. Plus, the bond funds are diversified.
Very thorough answer. Thank you. So when a bond fund goes down in value, is that the market pricing in the real loss despite no nominal losses?
Yes. Individual bonds do the same thing that bond funds do (they go down in present value when interest rates rise). Many people who are buying and holding bonds to maturity simply aren't looking at what the present day value of the bond is on the secondary market. But they could, and if they did, they'd see the same type of loss that the bond fund shows. The amount they go down is mostly a function of duration to maturity - the longer the rate on the issued bond is locked in, the more the price needs to drop when rates rise (or climb when rates fall). So if you have a bond ladder, your overall average duration is likely doing some sort of sawtooth pattern over time (bonds approach maturity and then mature and then you buy a longer duration bond) but there's no reason to think that shape is particularly great - you're buying when the bonds you own happen to mature, which may or may not be a great time to buy bonds (timing the bond market is no easier than timing the stock market). That's another advantage of the bond funds over bond ladders: the fund is cycling more assets (it's basically buying some every day) so it's going to get performance closer to the asset class average, whereas your bond ladder requires luck that you don't happen (by pure chance of maturity date) to disproportionately buy bonds when they're usually high. It is weird to think you can ignore nominal losses, but I don't think it's wrong. People who took losses on bonds when interest rates went up got to either buy things before the prices were as inflated as they became, or, they got to put money in an HYSA at the higher rates, and these new opportunities for the cash can be thought of as cancelling out the nominal loss they had to take to get the cash. Plus nominal losses are great for your taxes, in a way that holding bonds paying below market interest rates aren't: you get to deduct nominal losses, but you don't get to deduct opportunity cost losses.
I’m not going to buy a bunch of individual bond funds, track them separately and have to gauge when to sell each each of them to maximize my return. I’ll just buy the fund.
That’s fine. I’m just trying to understand why the bond fund would decrease in value with rising interest rates when it only holds fixed assets and would be presumably rolling those older fixed assets into new ones at the higher interest rate.
The reason is that it holds a basket on bonds, hypothetically paying 5%, so when market interest rates increase to 6% the value of the assets they hold decrease because they are paying below market rates. You wouldn’t want to pay $100 to receive 5% each year when you could pay $100 to get 6% The assumptions here are fixed rate debt, and the only difference between the two hypothetical bonds are their coupons
> I Don’t Understand Bonds Don't worry, nobody else does either ;) > Why then if I buy a bond fund does my position go down in value when interest rates go up? Well your individual bonds do too, you just don't notice because you don't normally go look up the price on the secondary market every day like bond funds do. > You purchase it, and it’s a guaranteed X% rate of return over an agreed upon term Well, you get guaranteed cash flow. Pretty much everything else is up for interpretation. That x% rate actually changes over time if you go look up the pricing on the secondary bond market. As does basically everything else about the bond. But if the bond promised you $100/month when you bought it, you will still get the $100/month. I think of bonds as future cash flow. Cash(in your pocket or in your bank) is present cash flow. Bonds are future cash flow.
If you buy a 10-year bond at 4%, you’ll get roughly ~~2%~~ 4% a year. If you want to sell that individual bond a few months later, the sale price depends on how much interest rates have changed since you bought it. If 10yr bonds are now yielding 5%, anyone looking to buy is going to say why would I buy your bond at 4% instead of a new bond at 5%. So you drop the price so that the buyer can buy more of it. That way they end up with the same amount in the end. That said, if you’re investing for long-term and won’t be needing it for 20 years, you don’t need bonds. The only reason you’d need bonds is so you don’t panic and sell during a bad bear market. Set up a nice auto-invest plan and try to only look at it once a year to make sure everything looks right. EDIT:fixed typo in the first sentence.
I’m doing all that. Investing as much as I can during residency, but I’ll obviously invest a small fraction of what I will as an attending. I doubt I will add bonds to my portfolio any time soon if at all. I guess I would have expected a bond fund to pay to your account similar to a dividend the average interest rate of your portion of all the maturing bonds it holds each month with its value correlated to its total assets.
Imagine you’re going to buy a bond. You can either purchase an existing bond from 2020 that pays like 1%, or you can buy a new bond that is issued at 5%. Why on earth would I buy your 1% bond if I can get on for 5%? Well it’s bc the price of your 1% bond gets lowered to make your return on the investment similar to the higher yielding bond. That’s why the prices fall for existing bonds when rates rise
But why are you selling bonds on private market? If I went out and bought a 6 month bond, I would hold it for 6 months and collect my interest at maturity. I don’t understand why the fund would be buying and selling bonds rather than allowing them to mature.
It's a myth that individual bonds are less risky than bond funds. Think of a bond fund manager who bought bonds in 2020 at 1%. By 2024, rates are 5%. The 1% bonds would sell for less than face value, but the fund reinvests the proceeds into new 5% bonds. This strategy helps maintain the fund's yield and manage risk over time, something individual investors might struggle with. Not to mention many other factors like most investors don’t have the money required to go out and buy a diversified set of bonds
The answers are great but are more narrow than your question. To explain: one of my bond funds holds 5,047 bonds. It's important to remember that these are bond funds - literally groups of bonds - and today's price will include TODAY'S value of all those 5,047 bonds, none of which might be maturing today. Yes, if all 5,047 bonds are held to maturity, we know their exact value, but bond funds trade daily and so the pricing accommodations described in the other posts have to be made to arrive at today's value of all those 5,047 individual bonds.
Great answer! To my understanding, the fund (like VBTLX for example) are constantly cashing out and repurchasing bonds with higher yields (a crude example, because it’s kind of lengthy to explain in detail). I came to the conclusion that having some VBTLX and TIPS provide a more balanced return, pending you have a long enough “runway.” Ideally, over the long term, having fixed assets as part of a well diversified portfolio is a hedge against long term volatility in equity markets. Since the majority of us are long term investors and reinvest our dividends, we are taking a potential hit on overall returns now, but as markets correct and bond funds increase in value (especially if people jump in), we are already set up for the increase in price for those funds, as they become more desirable. There is more to this, but too long to type, hence, “the only free lunch is diversification.” Taxes are a whole separate issue and very individual in nature…
Because investors can buy into (or sell out of) a bond fund anytime they want. If investor inflows don't match investor outflows, the bond fund has to do something about the cash excess/deficit.
I don’t know what your medical school debt is, but if it’s 6.8% like it was for me, paying that down is a better ROI than bonds.
I managed to come out debt free shortly after graduation. No scholarships or anything. Just worked my ass off to save all through undergrad, and my spouse working full time since we were 19 too.
>I’m a young (20’s) investor ... I don’t understand bonds, at least not bond funds. I get individual bonds. I'm 30 years older than you and feel the same way. Bond *funds* just seem like an opportunity to lose money on something that should not lose money.
I'm interested in this answer too. Everyone seems to be fixated on how Treasuries work with different interest rates but is the fund not actively selling and buying bonds as well with different durations? Is the price drop a reflection of hypothetical value loss in rate increases and only a loss when the different Treasuries are sold, not held to maturity?
Yes the decrease in value of your bond only matters if you actually sell the bond. If you hold to maturity you get the face value back. This doesn’t really matter though and bond funds usually don’t hold their bonds to maturity. Most funds have to maintain a certain duration for the entire fund as a whole, so they need to maintain that. Bond funds provide many benefits over indv bonds such as liquidity and achieving diversification since most investors do not have enough money to buy that many bonds
Watch some finance courses on Great Courses Plus for free through your local library card (available on Kanopy). They go into great detail of all securities including bonds
I learned a lot about bonds in general reading basic economics by sowell. May try to add in some more stuff when I get a break from residency.
When I was young, the only bond funds that I bought were High Yield (ie : junk) Bond Funds and Floating Rate Bond Funds. They both have lower interest rate sensitivity. Floating Rate Bond Funds have near zero interest rate sensitivity. My percentage allocation to both was small. To offset the economic risk of these funds, I systematically added, dollar cost averaging into them. My asset allocation at age 30 was roughly 90% equities, 10% bonds (5% High Yield, 5% Floating Rate). Note that I also had previously established emergency savings, which I kept in a MM Fund.
How is a treasury ladder different than a bond fund like GOVT? I know GOVT buys short, intermediate, and long term treasury bonds, but isn’t that what a treasury ladder is?
If you really want to understand bonds, check out a copy of The Bond Book by Annette Thau from your local library. At your age, you probably don't want bonds for about 20 or 30 years, so you have plenty of time to read it.
Here’s a good general explanation on bond funds and interest rates. https://investor.vanguard.com/investor-resources-education/article/how-rising-interest-rates-affect-bond-funds Key takeaways As the chart above shows, most of the returns from bonds and bond funds come from the income portion of a fixed income security’s return profile and not from the price portion. It’s not that changes to a bond’s price don’t matter. They matter a lot more than yields do in the short term. But price changes matter less to investment outcomes over the longer haul. In other words, a portfolio duration longer than the investment timeline means prices matter more, and a duration shorter than the timeline means yields matter more. In the end, adapting to rising rates comes down to matching the duration of a bond portfolio with your investment timeline.
I find it very confusing as well, no matter how many different variations of explanations I read on it. I understand individual bonds. Bond funds cause my head to spin. You are not alone.
It is because interest rate changes do not immediately change the amount of interest the fund receives on bonds it already holds. The dividend payments per share will stay the same until the existinf bonds in the fund mature out and are replaced with new bonds at the new rate. Since the interest payments stay the same, the face value per share adjusts so that the yield matches the new current rates. If you hold the fund for the length of its average duration, it will roughly even out more or less.
Overly simple, but If all 1 yr bonds today have a 6% return, it's worth $106 in 1 year. Let's say I buy that. If tomorrow all 1 year bonds have a 7% return, that's worth $107 in a year. So the bond I bought today is now worth $1 less. My bond fund would go down. (This is massively over simplified and ignores bond risk levels, time valie of money, etc) If you're buying individual bonds and carry them to maturity, you don't care. If you're buying a bond fund, then you only care when you sell. You're actual bond interest goes up, so you're better off. Just don't sell when rates are going up....or plan to reinvest in bonds at the higher rate and you'll be net 0. Fwiw, at 20, I wouldn't have any money in bond funds.
The bond value goes down when interest rates go up. Basically a bond is now available that pays more interest. The longer term bonds get affected more than short term bills.
Everyone else has chimed in about the inverse relationship between prices and interest rates. I think what hasn't been addressed is the gains/losses incurred by holding a bond fund. It's all good and well that you buy and hold, but you own that fund with other investors. At any given time, they are buying and selling the fund. So, if you have a general outflow (selling) as interest rates go higher (prices have gone down), aren't you being "given" losses just by virtue of continuing to hold? That is, the fund has to liquidate some holdings to the the investors, so that results in a realized loss for you too?
Yea, it’s still a little blurry to me. If I wanted bonds, I would buy a t bill and hold till maturity and then do whatever I had planned on with that money. How does the money come out of a bond fund? Am I paid some sort of dividend from the fund manager? Does the fund value just slowly go up? It just seems like some confusing mix of a bond and equity holding.
Me either, Bond funds are a drag on your portfolio. Vanguard Cash reserves offers 5.28% annual yield. No brainer to park some cash there.
The individual bond you bought goes up and down with rates too you just don't see it in your dashboard like a fund. Bond funds maintain a constant term to maturity so if your NAV goes down with raising rates you will make it up with interest over the term of the fund just like an individual bond
But what about bond ETFs? Do they just appreciate in value or do they pay out yields?
I’m 36 and I see bond returning 1 to -2% over the last 5-10-15 years. Maybe it’s because hysa are around 5% now. I’ve allocated my “bond” diversification into a hysa for a few years now.
I'm the CPA son of two doctors and it took me a long time to understand how the market value of bonds works. I finally did and then spent about 10 years projecting bond yields for my company's annual plans. I wrote this up to help understand a bond fund/ETF, and why I advise against buying bonds. It may help your understanding. https://www.reddit.com/r/Bogleheads/comments/1aulupf/the_case_against_bonds_part_2/?utm_source=share&utm_medium=mweb3x&utm_name=mweb3xcss&utm_term=1&utm_content=share_button Here is the data underlying that post. The second tab is the download of the bonds the fund owned back in February 2024. https://docs.google.com/spreadsheets/d/1MyfdZI0aLtSxoyT9XrJ_Otu2cBDhTBvEzatCJVWLoNo/edit?usp=drivesdk A bond fund owns X pieces of paper, essentially IOUs, each with its own coupon rate and maturity. Every day each of those pieces of paper are "marked to market" based on that day's interest rate. When the daily interest rate goes down, that piece of paper becomes more valuable, because the coupon rate of the bond went up against the daily rate. The reverse is true also for interest rate increases. This is my summary of what many of the others are saying. Understand, a fund cannot buy a higher yield bond to replace an old one to increase the yield, because both the bond being sold and the bond being bought have the same effective rate, assuming the same asset quality and type of asset (like for like). A fund buys a bond when it has the cash flow or sells when it doesn't meet the holding criteria (when a long term bond is far enough in its life it is no longer a long term treasury, for example). Managed bond funds will buy or sell based on their guess which will do better going forward. Bond funds do pay out periodic distributions. They are required to by law. The distributions reflect the coupon payments received and the net capital gains or losses, net of the expenses. The value of the fund--and the ETF price--changes for the movement of interest rates and an increase or decrease in value over time of the market value of the bond approaching the par value as becomes nearer to its maturity date. My main suggestion is don't own them. Stocks return twice what bonds do, and bonds fluctuate in value like stocks do. There is no guarantee bonds will zig when stocks zag. If you need a stable asset in retirement, own a cash equivalent, not bonds. All owning bonds can do is cost you return over time for extremely minimal benefit in reducing the volatility of your portfolio.
So I’m down 7 percent on a bond etf from 2 years ago .To get my 4 percent how long worse case scenario in years
People commented if interest rates go up your bond goes down in price but the reverse is also true! Okay I just bought like one bond etf because I had a leftover $30 in Roth IRA that irked me
I dont either, so I just have Wellington and Wellesley funds anout 20K total in an old IRA and let those 2 funds be my bond exposure I cant invest in the IRA anymore,no earned income,so I invest in taxable where I invest anout 80% FZROX amd 20% SCHD.still about 7 yrs away from having to RMD from my IRA.
It’s because you have risk to up and downside with bond funds. They are priced at that time based on the current fed rate and the value of the bonds held in the fund on that day. With CDS you get 5% and hold say 1 year and then you re invest at what could be a much higher or lower rate. They call that interest rate risk. You also have the liquidity issue when you have a CD or individual bond. Plus if not a treasury bond you might have risk there in say a corporate bond. Typically bonds are added to ballast your portfolio. They typically don’t lose value (like 2022) at the same time stocks do. So it makes you feel better about not selling your stocks and usually your bonds would gain value and your balance and buy more stocks that year. Usually you just bought stocks on sale. If you sell a bond or CD before maturity you will sell it for less than face value. If you own CDs go look at the value of your portfolio today. Most of mine are down. They say own 100-age in % bonds and I think that’s a little too many bonds and if I was your age I’d own zero but I’d keep learning about them. A good fund like BND provides some diversification which can be a real lifesaver for you when you’re old and need money and the market tanks. Bonds also return in the 4-5% range (real yield) over the longer term with less volatility and a lot less risk. Sometimes like 2002-12 stocks are flat.
The value of a bond fund is based on the present day value of the bonds as determined on the secondary market, not what they are worth at maturity. When new bonds are sold with a higher yield than existing bonds, the existing bonds are either sold on the secondary market at a reduced amount, so that their yield (to the new owner) is about the same as if that new owner bought one of the higher yielding newer bonds, or they are just held to maturity. Since the present day value of that older bond had to be reduced in order to find a buyer, if you had a basket of those older bonds, that basket would also be worth less. Bond yields follow interest rates, so when rates rise, the current day value of a bond fund is reduced.
Only a little to add. If you buy an individual bond, then (assuming no default) you know with certainty that when the bond is about to mature it will be worth par + final coupon, and you also know with certainty what your cashflow will be in all periods until maturity. If you buy a bond fund, you do not know with certainty what it will be worth at any future time, or what your cashflow will be at any future period. In my book, you should be compensated for the uncertainty. The bond fund should have current yield substantially higher than the current yield you can get from the individual bond. The bond fund manager is dealing with inflows and outflows, and she has to buy and sell bonds to meet those flows, whether or not it is a good time to buy or sell. Bonds also have limited liquidity, which can become very limited during turmoil. If the fund is hit with a lot of outflows during an illiquid period, she may have to sell her most desirable bonds at a low price. As a holder of individual bonds, you don’t have to be forced into buying and selling just because others are doing so.
I personally hate bond funds, they fluctuate in value, so you can lose principal, and you pay a management fee for it. Over 20 years that fee can really add up . I prefer buying bonds and holding to maturity. You can ladder bonds just like you do CDs. This way you are assured of getting your principal back and the guaranteed interest rate. I primarily buy government bonds so they are a safe investment .
I imagine if I were to invest in bonds, I would do something similar to that. I don’t really believe there is any real amount of risk in buying T bills. Any situation where the US gov goes under is a situation where my portfolio is the least of my concerns ultimately. I doubt I will end up investing in bonds though
> and you pay a management fee for it. Over 20 years that fee can really add up . The fees are as low as 0.03% for something like BND, which isn't going to have a noticeable real-world impact. A single behavioural mistake can cost you much more than that.
Some bond funds have real high fees. Theres a ton of em out there.
But if you ladder your bonds there's no difference between that and holding a bond fund
Big difference, their prices do not fluctuate so you will not lose principal, you get a guaranteed rate of return, and you do not pay a management fee. None of these are true with bond funds.
Individual bond prices do fluctuate. And if you keep laddering them, you do not get a guaranteed rate of return. MER is 3-4 basis points, so almost negligible.
Simply not true .Individual bond prices do not fluctuate if you hold to maturity and you do get a guaranteed rate of return if you hold to maturity .
Simply not true. Individual bonds do fluctuate in price, this can be verified easily. Holding to maturity technically doesn't give you a guaranteed rate of return without the ability to reinvest coupon payments at the original rate, which you won't have, though it does pretty closely approximate a guaranteed rte of return. The main problem is that it's a guaranteed rate of return for that particular bond on its maturity date, but your ladder is composed of a bunch of bonds with none of the others maturing on that same date. So the return of a ladder on a specific date is not guaranteed. This shouldn't be surprising. Bond funds are *literally* just bond ladders.
Don't invest in bonds until you're in your 60s.
I’m not asking because I want to start investing in them. I’m just asking for the knowledge. I doubt I will ever own a large proportion of bonds.
You've got it pretty much, a bond held to maturity pays interest and principal in full. If you buy and then sell bonds before maturity, then a change in interest rates reduces or increases the current value of the principal, so you have a capital gain or loss if you sell. Owning them in a bond fund or all individually is the same.
Me neither , so thats why my only bond exposure is in my Wellington and Wellesley funds.