Conference nyoss1::market_investing

The scenario you just describe can indeed happen.  You "win" with 
a bond fund by being in it for a complete interest rate cycle.

Jane Bryant Quinn's book "Making the most of your money in the 90's" 
gives more detail on the scenario you described.

Gim

    There's no basic difference between a bond *fund* and your own
    private collection of bonds.  Except of course a fund would be
    far more appropriate for an individual because of transaction
    costs, bid/ask slippage, record keeping, etc.
    
    Funds are not necessarily more or less stable than individual bonds.
    A 10-year bond fund would be more volatile than a single 5-year bond
    and less volatile than a single 30-year bond.  Typically.
    
    In an environment of rising interest rates you don't want ANY kind
    of bonds, issues or funds.  You want short term instruments.
    
      John

>    In an environment of rising interest rates you don't want ANY kind
>    of bonds, issues or funds.  

Including short-term bond funds?

> You want short term instruments.

Such as?

Thanks,

John Piekos

re: .2
    
    >"There's no basic difference between a bond *fund* and your own
    >private collection of bonds.  Except of course a fund would be
    >far more appropriate for an individual because of transaction
    >costs, bid/ask slippage, record keeping, etc."
    
    There is a big difference. Assuming the bond issues do NOT go under,
    with individual bonds, you WILL get the face value at maturity. Can't
    say that with a bond fund.
    
    >In an environment of rising interest rates you don't want ANY kind
    >of bonds, issues or funds.  You want short term instruments.
    
    Predicting interest rates is like predicting the stock market.  I
    thought rates bottomed out 8 months ago. I was surprised in Dec '92.
    But that's why we all  have a balanced portfolio -right?
    
    Gim
    
    

    If the bond fund consists of bonds
    
    with a similar risk profile
    with a similar maturity (1yr, 5yr, 10yr, etc.)
    
    then it will behave like that bond.
    
    Most bond funds though are actively managed so that it doesn't have a
    pure bond behavior.
    
    It you want to be technical about it, you also acquire diversity, and
    someone who will clip the coupons, and tell you if the bond has been
    called, etc. when you have a bond fund as opposed to putting the bond
    into a vault or safe deposit box.

.4>    There is a big difference. Assuming the bond issues do NOT go under,
.4>    with individual bonds, you WILL get the face value at maturity. Can't
.4>    say that with a bond fund.
    
    We must be speaking different languages.  There is NO difference.
    The bond fund WILL get the face value of each of its bonds at maturity.
    This is no different from you assembling your own portfolio, except
    for the costs and administration overhead as Pat noted in .-1.
    
      John

>    We must be speaking different languages.  There is NO difference.
>    The bond fund WILL get the face value of each of its bonds at maturity.
    
    I tend to make brief statements and that may have led to -.1's
    conclusions. Let's look at it again (and ignore the cost and admin
    overhead). Let me quote from Vanguard's Fixed Income booklet:
    
    "A bond fund differs from a bond [or portfolio of bonds] in an
    important way.  Unlike a bond, a bond fund never matures on a
    specific day. Instead, it maintains an average "rolling" maturity by
    selling off aging bonds and purchasing new issues. After 5 years, a
    5-year bond fund still has a 5 year maturity, whereas a 5 year bond has
    matured and repaid its principal, barring default."
    
    So - to answer .0's question: on maturity (example: 5 years from today
    with a 5 year bond) you will get back the face value of the individual
    bond - if you are the bond holder.  With a bond fund, the NAV at the
    end of say 5 years may be higher or lower than when you purchased the
    fund. In a rising interest rate environment you loose - that's what
    happened in the early 80's and late 80's.  In a declining interest
    environment (the past year), you win. If you hold the fund through a
    complete interest rate cycle, it may be a wash.
       
    The exception to the above are bond funds which hold bonds with
    a specific maturity date.
    
    Because of the above factors, holding individual Treasury notes may be
    more appropriate in a portfolio where the need is deterministic, eg. a
    child's educational expenses 4 years away.
    
    
    Gim
    
    
    

The Wall Street Journal, July 7, 1992 has an interesting article
comparing holding individual bonds vs a bond fund.  There is a table that
shows the annual rate (price change plus intereste) of return based on

	- holding a 5 year bond paying 6.75% and
	- holding a bond fund with a 5 year maturity.


					The Annual Total return

                                           Bond		Fund
					  ------	-----
If interest rates immediately rise 	   7.30%	5.68%
2 points and stay there

If interest rates immediately  drop        6.49%	7.90%
2 points and stay there

Gradually rise 2 percent                   6.85%	5.42%

Gradually decline 2 percent                6.65%	8.14%

    
    	Re: .8
    
    	I am not sure how to interpret that chart.  It is usually
    considered that when interest rates rise, the value of fixed-rate
    things like bonds will drop.  The chart shows, however, that the annual
    total return for the 6.75% bond when interest rates immediately rise by
    2 points as being 7.30%.  Likewise, the annual total return in the
    category of the interest rates immediately dropping 2% is only 6.49%,
    when I suspect it should be higher.  Perhaps these numbers are
    backwards?
    
    							-craig
    
    p.s.  I'll go read the article...
    

    
    	Re: .8
    
    	Ok, I read the article.  The verbage of the article says some
    rather good things comparing holding bonds to being in bond funds.  I
    don't like the chart of "annual returns", however.  They are comparing
    the case of holding a bond that has five years to maturity and holding
    it until it matures against being in a bond fund that continually
    reinvests to stay at an average five year maturity.  The part that I
    don't agree with is trying to determine how interest rate changes
    effect the annual return of holding a bond to maturity.  Perhaps I'm
    being simplistic, but if (following their example situation) I buy a
    bond yielding 6.75% (I presume they are referring to total yield to
    maturity) and **want to hold it until it matures**, I'm getting an annual
    return of 6.75% no matter what interest rates do.  (If I buy it being
    willing to sell it if interest rates go down, then that's a different
    story.)  I suppose in these cases it boils down to whether you compute
    annual yield as:
    
    	1) return divided by the bond's initial purchase price, or,
    
    	2) return divided by the bond's current market value.  (And, to be
    fair, factoring in the market-value minus purchase-price somewhere else
    in the equation.)
    
    If I want to hold it until it matures, #1 is the way I look at it. 
    Since the return is fixed and the initial purchase price is fixed, the
    result is a constant annual yield.
    
    							-craig

The article doesn't explain it. Here's what's happening. With a real bond,
you get interest payments. If I own a $1000 bond, I get 6.75% interest
payment periodically. Since the rate has gone up, I get to reinvest the
interest at 8.75% (6.75 + 2).  At the end of 5 years I get face value back.

With a bond  fund, the returns are dependent upon the NAV which will drop
because interest rates increased as you stated.

The opposite will occur if rates decrease.

These results are somewhat counterintuitive.

    
    	Ok, if its a question of where to reinvest the dividends, then I
    agree.  I wish the article was a little bit more careful in describing
    the scenario they were painting!
    
    							-c