Price variations in bond fund
Several months ago I bought shares in a mutual fund that invests in low-rated bonds for more income. I have noticed that the yield varies inversely with the daily price per share. As the yield rises, the price per share drops. Is this always the case? Why doesn't the price per share rise in direct proportion to the stated yield? D. W.Skip to next paragraph
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You are reserving the variables. Bonds pay a stated amount of dollars (interest) to the holder regularly regardless of the price paid. In these days of high interest rates, most previously issued bonds sell at a discount. The fund buys bonds with a dollar yield, and every day the price of the bonds will be marked to the market to determine the net asset value. As the price of the bonds goes up, the fixed dollar return on the bonds becomes a smaller percentage of the bond's value. Or vice versa. For example, suppose a bond with a face value of $1,000 pays $60 in interest yearly. At full price its yield would be 6 percent. But if the market values the bond at $500, the $60 in interest returns a yield of 12 percent. Even if the fund does not buy or sell, its portfolio is valued each day. But the dollars in interest remain the same. Thus, as bond values rise, yield falls, and vice versa. The mutual fund will likely be buying or selling -- or both -- some of its bonds regularly, and the value of its portfolio w ill likely change.