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I know that generally, the change in a bond or bond fund's price equals the change in yield multiplied by its duration. But I just read an article that claimed that this calculation is inaccurate when the starting yield is less than 1% and that the fund's price would be much more volatile as the yield approaches 0%. Is this true? Is there a calculator available online for this purpose?
you can't really because of other factors you do not know about such as credit changes when they buy and sell bonds . a credit upgrade or down grade on issues can effect a fund more then a small interest rate change .
There are many bond calculators online. Morningstar has one, as well as investopedia, money chimp, and others.
Keep in mind, if it's a callable bond you may need to look at both YTM and YTC. If investors believe the bond will be called then YTC is most important, for example.
They are talking bond funds not individual bonds here .
They really can't with bond funds ,especially etf bond funds because they trade at premiums or discounts to nav as well as have the credit worthiness rating of the bonds being a wild card
you can't really because of other factors you do not know about such as credit changes when they buy and sell bonds . a credit upgrade or down grade on issues can effect a fund more then a small interest rate change .
Wouldn't it come to the same thing though? A credit downgrade would cause a spike in yield, which in turn would bring prices down. What is the relationship between the yield and the price when the prevailing yield is extremely low?
the fund is just the values of each individual bond at any given point in time .
the bonds vary each day based on greed , fear and perception of future inflation and credit worthiness as well as any discounts or premiums to those net assets if an etf or closed end fund .
it is nothing set in stone as far as a relationship .
I was looking at buying Apple 5 year bonds. The yield was 2.25. I didn't know if that was a very good rate, so I passed and bought a one year CD paying .80 instead.
Wouldn't it come to the same thing though? A credit downgrade would cause a spike in yield, which in turn would bring prices down. What is the relationship between the yield and the price when the prevailing yield is extremely low?
Yes, if it's a simple bond it makes no difference what caused the change in yield.
In practice yield changes are usually not instantaneous. And keep in mind that when the price of the bond changes, so does the duration. Duration also changes as the time to maturity changes. So the rule of thumb for calculating price changes by using duration may give a reasonable estimate. But to get an exact answer you need to use a bond calculator.
Yes, if it's a simple bond it makes no difference what caused the change in yield.
In practice yield changes are usually not instantaneous. And keep in mind that when the price of the bond changes, so does the duration. Duration also changes as the time to maturity changes. So the rule of thumb for calculating price changes by using duration may give a reasonable estimate. But to get an exact answer you need to use a bond calculator.
How does a price change in the bond change duration?
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