ST Bond fund questions...

[Lsbcal]

Yes, the bond fund took the bath and all who owned it during the rate rise. But I am thinking of the case where someone now buys that fund with that bond. Don't they get the current deal i.e. the bond at a reduced price plus the old dividend yield?

 

[target2019]

The misunderstanding of bonds vs bond funds continues.

I agree with your thought. And the same is true of stocks vs stock fund.

There will always be posts on the subject(s), coming from individuals with very different knowledge levels.

It takes many words and links to explain concepts over and over again.

Perhaps there is one brief page that illustrates the difference?

 

[pb4uski]

Yes, the bond fund took the bath and all who owned it during the rate rise. But I am thinking of the case where someone now buys that fund with that bond. Don't they get the current deal i.e. the bond at a reduced price plus the old dividend yield?

I don't see how that could happen. To keep it simple, and these numbers are at 1/31/23, the latest available from Vanguard; the porfolio coupon is 2.3% and the average effective maturity is 2.8 years. The NAV at 1/31 was $9.98 and the unrealized losses were $0.54/share or 5.41% of NAV.

So let's say that you bought the fund at 1/31 for $9.98 and they immediately put the fund into runoff. You would get the 2.3% coupon as the fund ran off and you would get the 0.54/share unrealized loss as the bonds mature and the unrealized losses unwind... over 5.6 years (2* the 2.8 year average effective maturity) or about 0.97% a year.

So that suggests that you would get ~3.27% from the portfolio that you are buying on 1/31, but the ER is 0.07% so that drops the return to 3.20%.

I tried to schedule out the cash flows if the fund were put into runoff and came up with an IRR of 3.33%... pretty close to the simple version above.... so I just don't see how someone buying the fund at NAV would ever get the 4.77% SEC yield.

https://investor.vanguard.com/investment-products/mutual-funds/profile/vbirx

3.33%	0	1	2	3	4	5	6
NAV	-9.98							-9.98
Realized losses (11c)		-0.08	-0.03					-0.11
Income (2.3% coupon)		0.20	0.17	0.11	0.06	0.02	0.00
Expenses (0.07%)		-0.01	-0.01	0.00	0.00	0.00	0.00
Maturities (9.98 NAV + unwind of 0.54 unrealized loss)		1.65	2.89	2.45	2.26	1.16	0.11	10.52
Total	-9.98	1.76	3.03	2.55	2.31	1.18	0.11