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Do bond mutual fund investors make profits from the yield of the bonds or the price of the bonds inside the fund?

When the Federal Reserve changes interest rates, are only the price of government bonds affected by the increase or decrease of the interest rate and not the price of corporate bonds?

I thank you for your replies.

ANSWER: Hi Kenneth,

A mutual fund's total return (profit) incorporates income/dividends plus price appreciation.  The Federal reserve changes/influences two rates: the discount rate and the federal funds rate. However, other rates are influenced by the Fed's decisions such as those rates found on corporate bonds.  For example, if the Fed over time raised the discount rate to 15%, I can assure you that corporate bonds rates over time would also rise. It is important to know that investors actually determine actual corporate bond rates/yields through purchases and sales of these securities.

I hope this helps,

Michael Weiss, CFA

---------- FOLLOW-UP ----------


I want to thank you for your reply.

If the Federal Reserve does raise interest rates, will this decision and outcome have a negative effect on those who own bond funds? If so, what would occur?

I thank you for your follow-up reply.


Your welcome. Higher interest rates are generally not good for existing bond holders. Based on the the mathematical formula for the value of a bond, a higher interest rate would reduce the present value of a bond. It is hard to know exactly what would happen.  Part of this depends on what the market is expecting.  If the market expects rates to rise, then the decline in bond values might not be that significant. If the rate change is unexpected, the opposite might be true. Remember the prices of long term bonds are determined by the interaction of buyers and sellers.

I hope this helps,
Michael Weiss

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Michael Weiss, CFA


I can answer most questions about mutual funds.


I am the owner of Series 7 Exam Tutor , a financial tutoring business that provides personalized tutoring for the Series 7 Exam, the Series 6 Exam ,the Series 65 Exam, the Series 66 Exam, the Series 63 Exam and the Series 24 Exam . I also offer tutoring for finance courses. For additional information, please visit, Finance Exam Tutor. Prior to launching Series 7 Exam Tutor, I worked in investments for 20 years with the majority of this time focused on investment analysis and portfolio management. I have worked for large companies such as Merrill Lynch and Evergreen Investments and have also worked for smaller firms as well. Throughout my career, I have sought to mentor younger colleagues whenever possible, especially those enrolled in the CFA program. I completed the CFA program in 2002 after passing all three exams on the first try. I also passed the Series 7 Exam with a score of 94%. For additional information about me, you can visit the links below:

CFA Institute and CFA Society of Philadelphia


M.B.A. in Finance & Investments from the Zicklin School of Business at Baruch College and a B.A. in Finance & Economics from the City University of New York - Baccalaureate Program.

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