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Old 05-09-2014, 01:19 PM   #21
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Quote:
Originally Posted by Henry Lili View Post
When one buys a bond at a premium one only gets back the original issue price of the bond not necessarily what was paid if it was bought above the issue price. I would think the same logic applies to target date funds.....
Yes, I would agree. Both the iShares and Guggenheim sites include a calculator that calculate an estimated yield if held to the terminal date. The yield is composed of 1) the current yield to maturity of the underlying bond portfolio based on the NAV as of a stated date +/- an adjustment of yield for the difference between the NAV and the purchase price provided by the investor less the ER.

Below is the calculator from the iShares Mar 2020 Corporate Term ETF using the current market price (which exceeds the NAV, hence a reducing in yield for the "premium" paid.

Quote:
The NAV (as of 08-May-2014) used in the calculation is $104.08. The value you enter should correspond to your estimated market purchase price as of 08-May-2014.

Please note that the results generated by the Estimated Net Acquisition Yield Calculator are for illustrative purposes only and are not representative of any specific investment outcome.

The Average Yield to Maturity shown is the weighted average yield to maturity of the individual bonds. During the final year of the fund's life, the underlying bonds will mature and the proceeds will be held in cash equivalents until the liquidation of the fund. The investor's total realized yield to fund maturity will be influenced by the yield earned on these proceeds during the final year. If the future yield on cash equivalents is lower than the current Average Yield to Maturity for the portfolio’s bonds, the realized yield to fund maturity is also expected to be lower and vice versa.

Enter Price $ 104.83 CALCULATE
Average Yield to Maturity 2.52%
+ Price Adjustment -0.16%
= Price Adjusted Yield2.36%
- Expense ratio (10 basis points)-0.10%
Estimated Net Acquisition Yield 2.26%

Calculate the Estimated Net Acquisition Yield (ENA Yield) based on the projected market purchase price that you input. This estimate also reflects the deduction of the expense ratio (available in Key Facts).

Please note that the results generated by the Estimated Net Acquisition Yield Calculator are for illustrative purposes only and are not representative of any specific investment outcome.
So as long as you hold to maturity putting aside credit risk I would view buying the instrument as akin to buying a bond or CD maturing in 2020 with a 2.26% interest rate.
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Old 05-11-2014, 05:10 AM   #22
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be very careful with muni bonds .

they are a strange breed of bond.

in a potential falling rate scenerio many can be called in 10 years so they are priced more like 10 year bonds.

but if the scenerio takes a a different view and it looks like rates will rise muni bonds can get hammered as they get repriced to act more like 30 year bonds.
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Old 05-28-2014, 04:03 AM   #23
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interesting about longer term bonds and the fed raising interest rates.

actually there is little link to longer term rates rising when the fed raises the fed funds rate.

since 1980 the fed has raised the funds rate higher than 1% in a year 6 times. only once in 1994 did the 10 year lose money and fell only a fraction of what you would have calculated it would.. below are the returns the 10 year saw every time time the feds fund rate was raised more than 1% in a year and the fed tried to raise rates.. just the opposite happened and bonds went up in value just about everytime the fed pushed short term rates higher.

1989 saw the fed funds rate raised 1.64% the 10 year increased 12.74% in value

1994 it was raised 1.18% 10 year fell 1.93 %

1995 the feds fund rate was raised 1.62% while the 10 year soared 15.30%

2000 saw it raised 1.27% ,the 10 year was up 10.10%

2005 feds fund rate raised 1,.87% 10 year up 1.57%

2006 feds fund rate up 1.75% 10 year up 4.08%

to date the fed has cut back on purchases by half and the worlds investors have bid rates down drastically. just the opposite of what all those great predictors out there preached. my total bond fund has risen 4% since the cut back started. the 30 year bond is up over 12% this year.

with 100 trillion in the worlds bond market and the trillion a month that actually trades fed intervention is peeing in the ocean if investors see things differently.

the bond markets are seeing things worse than the fed is.

i am not saying run out and buy bonds but the fact is anyone who thinks they can predict the direction of interest rates and when is foolish.
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Old 05-28-2014, 04:55 AM   #24
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One reason why long rates drop when the Feds raise short term rates is that raising short term rates has a slowing effect on the economy, thus reducing inflationary pressures. So the interest rate curve tends to flatten, in anticipation of slower growth. It might even invert, in anticipation of a recession.

It is indeed fascinating how as the Fed reduces its bond purchases (taper), the 10 year has rallied rather than the opposite most expected. The rapidly shrinking US deficit (from $1.4T peak to $0.4T - less borrowing demand) may have something to do with that, plus there seems to be increased demand for treasuries from overseas.
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Old 05-28-2014, 05:02 AM   #25
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yep , the bond market marches to its own drum. when it is good ready and sees things in a different light that is when longer rates will rise , not just because the fed hikes the fed funds rate .

actually there was an article in forbes that i kind of disagreed with

How Not To Get Soaked When The Bond Bubble Bursts - Forbes
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Old 05-28-2014, 09:50 AM   #26
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According to one analyst, US Government bonds are still the shelter of choice worldwide. Foreign money is poring into US bonds keeping interest rates low despite factors that might raise them. He offered no data to support this during the 17 second clip on radio.
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Old 05-28-2014, 10:50 AM   #27
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Also, Europe rates are expected to be lowered due to their weak economy and very low inflation, so this attracts buyers to the US treasuries, as well as strengthening th dollar.
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Old 05-28-2014, 10:52 AM   #28
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Quote:
Originally Posted by mathjak107 View Post
yep , the bond market marches to its own drum. when it is good ready and sees things in a different light that is when longer rates will rise , not just because the fed hikes the fed funds rate .

actually there was an article in forbes that i kind of disagreed with

How Not To Get Soaked When The Bond Bubble Bursts - Forbes
Yeah - that seems to use the simple formula of interest rates staying the same across all durations even though history shows it rarely happens that way.

Another market perspective on the timing of rate rises:
UPDATE: Market-Based Rate Predictions
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Old 05-28-2014, 11:29 AM   #29
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The Fed has been fighting deflation with the low interest rates and money printing, and are hoping for inflation to make it easier to handle the huge debt. They just hope inflation doesn't get out of control. They need to keep interest rates lower than the inflation rate to keep the debt from exploding more than it already is. The worst case is deflation followed by hyperinflation where bond interest rates will remain low only to be devoured in value by hyperinflation and the high interest rates that will be required to fight it. We live in interesting times.
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Old 05-28-2014, 11:38 AM   #30
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BTW, the 10 year just dropped below 2.5%. In fact it's below 2.45%, lowest since last June, almost a year ago!
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