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Reply to "bond funds - explain to me how they will decline with rising interest rates"
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[quote=Anonymous]I'm struggling with understanding how bonds and bond funds will take a big hit with rising interest rates Here's what I understand: If I have a bond, it should pay the coupon rate until mature or recalled. And there is an underlying value, which is related to interest rates. FV is usually 1000. Based on these factors (coupon rate, value, duration), I believe one derives the NAV (net asset value) for a bond fund. Here's where I have trouble: Unless the bond is recalled or goes unpaid, wouldn't it always be worth the coupon rate as a floor? Doesn't this limit how far the value can drop? And why would the drop be large? [/quote]
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