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Learning, Sharing, and Teaching => Investor Alley => Topic started by: starguru on May 15, 2015, 09:45:31 AM

Title: Another bond/rising interest rate question
Post by: starguru on May 15, 2015, 09:45:31 AM

When interest rates rise (whenever that happens), will funds/ETFs like BND increase their dividend payouts? 

Title: Re: Another bond/rising interest rate question
Post by: Aphalite on May 15, 2015, 10:14:20 AM

Gradually, as they buy up new bonds with higher interest rates

What will initially happen is the price of the ETF will decrease while payout stays the same, then as newer, higher interest paying bonds are obtained in the portfolio, the weighted average payout rate will increase

Title: Re: Another bond/rising interest rate question
Post by: forummm on May 15, 2015, 12:51:01 PM

The yield will go up very quickly (a small amount, but quickly). But that's because the price of a share will go down very quickly (a small amount of decline, but it will be quick). So the dollar amount of dividend per share will be about the same, but the dividend as a percentage of share price will rise. This will happen each time rates are raised. It will also go up an additional amount more slowly as well for the reasons Aphalite mentions.