Question about duration

[lawman]

Is there anyway I could determine the change in share price of a bond fund assuming an interest rate increase of 3%
https://investor.vanguard.com/mutual-funds/profile/VFIDX

 

[gcgang]

Rule of thumb is 1% x # of years duration change in price in opposite direction of rate change.

Example, your duration is 5 years. Rates go up 2%. You lose 10%.

 

[lawman]

Rule of thumb is 1% x # of years duration change in price in opposite direction of rate change.

Example, your duration is 5 years. Rates go up 2%. You lose 10%.

I'm still not clear..If current share price $8.71 and current duration is 6.4 yrs. and rates rise 3% what would share price drop to..Please if you don't mind show your work..THANKS

 

[jazz4cash]

Is it 6.4x3%=19.2%
19.2%x$8.71=1.67
$8.71-$1.67= $7.04
?

 

[lawman]

"A general rule is that with every 1% change in interest rates (up or down), the price will also change around 1% in the opposite direction, for each year of duration. For example, if a bond has a value of $100, a duration of 4 years, and rates rise 1%, then the price would decrease by 4% to $96 (1% x 4 years).Jun 18, 2020"

 

[njhowie]

No. There is no formula which is going to tell you that.

The reasoning is that the NAV of the bond fund is the sum of the NAVs of the constituent individual bond holdings (spread over the number of fund shares). The NAV of each of those bond issues is determined by its "price", which is the mark-to-market and it is revalued nightly. Mark-to-market is not singularly pushed around by interest rate changes, it is based on the (last) quote...so it is influenced by investor irrationality.

For bonds that are illiquid or there is no market, the fund may apply a proprietary formula for coming up with a valuation, which may be unreliable.

So, mark-to-market may not accurately reflect a bond's true value as interest rates change. That means you are not going to be able to determine how the NAV of the fund is going to change day to day simply by looking at interest rate changes. It boils down to what price buying/selling is taking place.

 

[pb4uski]

Is it 6.4x3%=19.2%
19.2%x$8.71=1.67
$8.71-$1.67= $7.04
?

+1 Assuming a 3% rate spike and durations of 6.4

 

[youbet]

Remember that the "increase in rates" refers to the rates of the holdings of your fund and not the rates controlled by the Fed.