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a guide to

Bond Mutual Funds

A bond mutual fund is an investment company

that pools money from shareholders and invests

primarily in a diversified portfolio of bonds.

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Lets say a $10,000 bond paying 5 percent interest with a

maturity of 30 years is bought today. Now suppose the buyer

needs to sell the bond af ter only 10 years. At that time, the

interest rate on new bonds is 7 percent. Why should investors

purchase a bond paying only 5 percent when they can

currently get 7 percent? In order to sell it, the owner sellingthe bond will need to drop the asking price of the bond below

its $10,000 face value to approximately $7,900. This will, in

effect, allow the new purchaser to earn the going market yield

of 7 percent on the bond based upon the lower price.

interest

rates

decline bond

prices

rise

interest

rates

rise

bond

prices

decline

The opposite is true when interest rates decline. A bond will

then be paying more than what the current market offers, and

the bonds owner could charge a premium price. The new

purchaser receives less than he or she paid for the bond when

it matures, making up for the higher-than-marketplace interest

payments received in the interim.

how do changing interest rates

Affect a Bonds Value?

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