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Posted by joetaxpayer on July 17, 2007, 10:15 pm
D T W .../... wrote:
> What does this mean? It's an intermediate term bond fund.
>
> "The fund normally has a weighted average maturity of five to ten years"
It's part math, and part meaningless. If I hold two bonds, one with a 1
year maturity, and the other, 11 years, the average time is 6, right?
But If it happens that I hold 2X the value in the 1 year as the 11, the
average is 4-1/3. Meaningless, because that range is huge, 5 to 10. A
given fund should (in this age of computers and the instant calculation
for these things) provide the duration of the fund to an accuracy of .1
years. Duration is, simply put, the average, weighted time, for all
coupon payments on a bond. A two year note may have three coupons so a
5% YTM may calculate to a duration of 1.9 years. When calculated for a
fund, it will give you a good indication of how the fund will go up or
down in value based on movements in interest rates. e.g. a fund with a 5
year duration will go up in value about 1% if rates drop .2%. This
explanation is a slight simplification, not much.
JOE
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