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‘#AskHansi’: How can debt funds fall in value when invested in safe government bonds?

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Government bonds are priced on a daily basis. That means that investors all over the world can buy and sell on any given day.They reflect their view of interest rates, and the general economy in that price.

Say, you bought a bond for $100 and say, the coupon on it is say 7%. Say, six months down the track, there is another one that is issued at 8%. The value of your bond has to fall, just so the yield on the new one is also 8% to match what someone could get just by buying directly from the government.

That's only a temporary valuation of what you would get if you were to sell it that day. But say you keep it for 10 years. You will still get your original hundred dollars back. The value actually hasn't fallen. In the case of government bonds, and bond funds, all these fluctuations tend to be temporary because there's no change in the creditworthiness per se (for domestic investors). It's just fluctuations due to views on interest rates.