What happens to the net asset value of a mortgage mutual fund when interest rates rise?
Understand the Problem
The question is asking us to explain the impact of rising interest rates on the net asset value of a mortgage mutual fund, which involves understanding the relationship between interest rates and the value of financial assets.
Answer
The net asset value decreases.
The net asset value of a mortgage mutual fund typically decreases when interest rates rise.
Answer for screen readers
The net asset value of a mortgage mutual fund typically decreases when interest rates rise.
More Information
When interest rates rise, newer securities offer higher yields, making older securities with lower yields less valuable. Thus, the net asset value (NAV) of mortgage mutual funds decreases as the market value of the fund’s holdings falls.
Tips
A common mistake is assuming that rising interest rates directly increase the value of all securities. It’s crucial to remember that bonds and similar fixed income securities generally decrease in value when interest rates increase.
Sources
- Investing In Mortgage Funds - What You Need To Know - New Silver - newsilver.com
- How Interest Rates Affect Mutual Funds - Investopedia - investopedia.com
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