[richpulubi]

I invest in a bond fund uitf, but i don't know what influences its navpu.  You can kinda predict the equity fund by watching the psei, cuz they kinda correspond. I can't predict the bond funds though.

Some books say it's the prevailing interest rate.  If the rate goes up, the navpu goes down. and vice versa.

Sometime this year, interest rates will definitely go up, so does that mean the bond fund navpus will go down?

I'm intending to invest some more, so should i wait for the rate hike first?

[adomicbomb]

Depends on how much interest Government Bonds offer i guess. The only thing Bond Funds invest in are fixed-income securities like government bonds and treasury bills. If Interest for these fixed-income securities are high, then the money the fund makes also rises and so does the NAVPU.

[GoodSteward]

If Im not mistaken, bonds are also being traded in secondary market right? Not just government bonds but also corporate bonds. So when there is trading there is "haggling" of rates, correct me if Im wrong though....

[richpulubi]

The way I understand bond funds is that the navpu fluctuates depends on the bonds it contains.  If the bonds, let's say, has an average yield of 5%, but the prevailing rates go up to 6%, then the bonds of the fund will be selling at a discount.  Thus, the fund itself will be of less value therefore the navpu will go down  I think the rule of thumb is that for every increase of 1% in interest rates, the navpu of a bond fund goes down by 10%.  I don't know if this is true all the time.

The thing is that I think interest rates will be going up sometime soon, given the rapid rise of inflation, and that other countries are also raising rates.  And so, the navpus of bond funds may go down further. 

Most of the articles I get to read about bond funds in the US are the same.  Underweight your bond funds soon cuz chances are high that they will increase interest rates in the US.

[bauer]

If Im not mistaken, bonds are also being traded in secondary market right? Not just government bonds but also corporate bonds. So when there is trading there is "haggling" of rates, correct me if Im wrong though....

you are relatively correct.  plus bond funds also buy corporate loans whose interest rates are privately determined.  it maybe fix or floating interest rate.

by and large, it is a little bit difficult to get a reference point in determining your bond fund's NAVPU (going up or down).  You can just generally follow the trend of interest rates but it is not a very accurate gauge.

[dudefullness33]

So, is it suffice to say that it is not advisable to invest in bond funds / fixed income at this time?

[mjtfernandez]

How does the NAVPU of the Bond Fund go up and down?

We all know that a Bond is a contract between the creditor and debtor in which the debtor will pay the creditor the amount of money loaned after a number of years. The creditor will in return have interest income to compensate for the lost opportunity to invest the money loaned by the debtor.

Debtors pay the creditor interest usually either quarterly, semi-annually or annually depending on the bond indenture [contract]. This explains why the bond fund ALWAYS increases in value over time. Interest income received is divided pro-rata according to the number of units owned by the investors.

The question is why does the NAVPU go down sometimes?

Bonds are valued through a method that discounts [computes] the future interest payments paid by the debtor. The interest rate used to discount [compute] is called the effective rate [market rate] of interest. Another interest rate important in the valuation of bonds is the called the nominal rate of interest. The nominal rate is the one state in the bond indenture [contract] in which the debtor is required to pay. So if the bond is 100 Million and the nominal interest rate is 10%, then the debtor is to pay 10Million yearly.

Bonds are valued using a method called discounted cash flow method. The value of the bonds increase or decrease depending on the effective interest rate [prevailing rate] since the nominal rate is fixed [because that is what is stated in the bond indenture, unless it is a floating rate bond].

For example, if the effective interest rate is greater than the nominal interest rate, then the bond will be valued at a discount (below the par value). This means that the value of the bonds decreased because the prevailing rate is higher than the rate stated in the bond indenture. If the effective interest rate is lower than the nominal interest rate then the bond is sold in a premium. In simple terms, if you got a bond that pays you 10% interest every year, then the prevailing interest rate is 5%, surely if you would sell the bond to another person, it must be more than the par value because it must be sold in a premium. Why will you sell it as is when you got a bond that gives you 10% and other bonds issued currently only provide interest rate of 5%? The same way goes the other way around if you get a bond at a discount. If your bond pays you 5%, then the market rate is 10%, then surely no one will buy it at a premium, worst it will be bought at a discount from you.

Therefore, the value of the bonds in the fund is computed using the discounted cash flow method. Plus the interest received from the bonds divided by the number of units in the fund equals the NAVPU.

More at my blog - http://mjtfernandez.blogspot.com

Mark
Post Merge: Jan 17, 2011, 02:48 PM

So, is it suffice to say that it is not advisable to invest in bond funds / fixed income at this time?

In my opinion, there is no right time or wrong time to invest in funds. But if you invested a few years ago, you could have gotten higher interest rates and thus higher NAVPU.

In my opinion it is better to invest not based on returns but based on your investment goal.

If your investment goal is:

5-9 years go fixed income (even if interest rates are low now, it would still be better to invest than to spend)
10 -14 years go balanced fund
15 plus years go equity fund

If you wish to go further than the equity fund, go growth fund.

Growth fund is an investment in which you could be able get higher than equity fund rates of return because the money will be invested in growing companies (thus termed growth stocks).

You might have read kiyosaki stating that he invests in growing companies because they provide higher rates of return.

However, be sure to properly allocate your investments because in the end, a well diversified investment is still the best way to go.

[richpulubi]

How does the NAVPU of the Bond Fund go up and down?

We all know that a Bond is a contract between the creditor and debtor in which the debtor will pay the creditor the amount of money loaned after a number of years. The creditor will in return have interest income to compensate for the lost opportunity to invest the money loaned by the debtor.

Debtors pay the creditor interest usually either quarterly, semi-annually or annually depending on the bond indenture [contract]. This explains why the bond fund ALWAYS increases in value over time. Interest income received is divided pro-rata according to the number of units owned by the investors.

The question is why does the NAVPU go down sometimes?

Bonds are valued through a method that discounts [computes] the future interest payments paid by the debtor. The interest rate used to discount [compute] is called the effective rate [market rate] of interest. Another interest rate important in the valuation of bonds is the called the nominal rate of interest. The nominal rate is the one state in the bond indenture [contract] in which the debtor is required to pay. So if the bond is 100 Million and the nominal interest rate is 10%, then the debtor is to pay 10Million yearly.

Bonds are valued using a method called discounted cash flow method. The value of the bonds increase or decrease depending on the effective interest rate [prevailing rate] since the nominal rate is fixed [because that is what is stated in the bond indenture, unless it is a floating rate bond].

For example, if the effective interest rate is greater than the nominal interest rate, then the bond will be valued at a discount (below the par value). This means that the value of the bonds decreased because the prevailing rate is higher than the rate stated in the bond indenture. If the effective interest rate is lower than the nominal interest rate then the bond is sold in a premium. In simple terms, if you got a bond that pays you 10% interest every year, then the prevailing interest rate is 5%, surely if you would sell the bond to another person, it must be more than the par value because it must be sold in a premium. Why will you sell it as is when you got a bond that gives you 10% and other bonds issued currently only provide interest rate of 5%? The same way goes the other way around if you get a bond at a discount. If your bond pays you 5%, then the market rate is 10%, then surely no one will buy it at a premium, worst it will be bought at a discount from you.

Therefore, the value of the bonds in the fund is computed using the discounted cash flow method. Plus the interest received from the bonds divided by the number of units in the fund equals the NAVPU.

More at my blog - http://mjtfernandez.blogspot.com

Mark
Post Merge: Jan 17, 2011, 02:48 PMIn my opinion, there is no right time or wrong time to invest in funds. But if you invested a few years ago, you could have gotten higher interest rates and thus higher NAVPU.

In my opinion it is better to invest not based on returns but based on your investment goal.

If your investment goal is:

5-9 years go fixed income (even if interest rates are low now, it would still be better to invest than to spend)
10 -14 years go balanced fund
15 plus years go equity fund

If you wish to go further than the equity fund, go growth fund.

Growth fund is an investment in which you could be able get higher than equity fund rates of return because the money will be invested in growing companies (thus termed growth stocks).

You might have read kiyosaki stating that he invests in growing companies because they provide higher rates of return.

However, be sure to properly allocate your investments because in the end, a well diversified investment is still the best way to go.

Thank you very much for the detailed explanation!

But, for laymen like me, can you kindly explain why the local (Philippine)bond funds have declined tremendously recently?  That the only time it went down this much was during the financial crisis of 2008? 

Personally, I'm not that worried about the ups and down.  I just need to understand why it happens so I know when to buy some more funds.  I know timing the market is risky, but understanding it gives us more confidence and peace of mind.

[GoodSteward]

And followup question, for the past 3 months, it has been flat too...any variables that could have affected this?

[graphene]

risk aversion makes bond yield go up. while increased appetite for risk will move it down. how do we know if investors are after high risk investments? watch the stock market. it generally moves in an inverse relation with bond yield. when investors are fearful, they invest more in bonds.

[bauer]

Bond funds are generally flat right now due to the following factors:

1. There is a "european bond fund crisis" that affects global bond fund yields.
2. There is too much money invested in bond funds since there are fears of another financial crisis.
3. Bond yields have reached 'saturation point' such that interest earned is not 'attractive'
4. Rising commodities & equities capture some 'bond fund' investor appetite
5. central banks (FEDS, EURO) influences markedly the bond rates due to their influence on interest rate setting.
6. lack of corporate borrowers to avail of bond fund capital while there is no dent on government/state borrowings, there is a worry about huge fiscal deficits that discourage lending to them.
Post Merge: Jan 18, 2011, 12:06 PM

risk aversion makes bond yield go up. while increased appetite for risk will move it down. how do we know if investors are after high risk investments? watch the stock market. it generally moves in an inverse relation with bond yield. when investors are fearful, they invest more in bonds.

I beg to DISAGREE that bond yields has an inverse relation with stocks.  If it is true, investment in either stocks and bonds will become as EASY as playing with 'tetris'

[botbot16]

Hi Everyone, I'm just wondering what are the possible effects of the pending increase in the interest rates on a peso bond fund? Does it mean, it is not the good time to invest in this kind of UITF? I understand that as the effective interest rate increases the FMV of your bonds (discounted value using EIM) will decrease.. Will this result to sudden drop in the value or this has already affected the price of the fund due to the negative sentiment (low demand)?