can someone please help me with the following question please.
Lets say interest base rates are 3% and I buy a bond fund paying 4%. Now if base interest rates go up to 4% and new issue bonds pay 5% interest. My existing bonds face value on the open market would go down (e.g. why would anyone buy my 4% bond when they can buy a new bond paying 5%, unless I offer a discount for my bond, below par).
Now lets consider a bond found run by a pension found where the bonds they hold are split over various maturity 1-5 years, 5-10 years, over 10 years.
Lets say I decide to buy into this bond fund by allocating part of my regular pension contributions to this bond fund.
Now my question is 'in general' what happens if interest rates in the open market increase, as far as I can see two things may happen
1) People invested in equities (shares) fear higher cost to the companies for which they hold shares, decide to sell and buy bonds as the interest rate on offer is now more attractive. This supply and demand should in theory push up bond prices (including the bonds I hold in the pension).
2) However, interest rate rise hurts existing bonds and therefore this should in theory bring bond prices down (including my pension fund bonds).
The above is my understanding (not necessarily correct), therefore can someone help me understand the likely impact (I am not asking for finical advice as it were) if I buy into bond fund now, and interest rates rise over the next several months?
Thanks all in advance