Bond funds (fromb Bogleheads)

• unlike an individual bond, the NAV of a fund does not automatically return to par on a specified date.
• the price at which you will be able to sell shares of a bond fund cannot be known ahead of time
• if you own an individual bond, each year its market value (its price) moves one year closer to par

People should hold bond funds (high grade, short or intermediate term, and a mix of nominal and inflation-adjusted), and just ignore the NAV. All that matters is total return, and if you hold the fund longer than the duration, your total return will be just fine

Duration

"It is the payment-weighted point in time at which an investor can expect to recoup his or her original investment."

Bond funds maintain a fairly constant duration.

The "point of indifference" for the owner of a bond fund in dealing with interest rate changes

• If interest rates rise after purchasing a bond fund, the NAV of the fund falls, which hurts the investor

• However, the dividends that the bond fund throws off can now be reinvested at a higher rate

• The duration is the length of time that an investor needs to hold the fund for the increased yields to compensate for the decrease in NAV

• duration represents the length of time it would take for the total value of the fund, with dividends reinvested, to be worth exactly what it would have been worth had interest rates not risen

• as the time when you will need the money approaches, you must reduce your duration accordingly, to protect you against any further increases in prevailing rate

Principal (or face value, or face value) = original sum of money borrowed in a loan.