All else being equal, a bond fund with a longer average maturity or average duration will usually generate higher interest income than one with a shorter average maturity or basic relationship holds true because longer-term bonds must pay higher interest rates than shorter-term bonds to compensate for the risk that future events (such as rising interest rates or inflation) will erode the bond investment’s value. How interest rates affect bond fund prices For many new investors, one of the most confusing aspects of investing in bond funds is the relationship of a bond fund’s share price to interest rates. But investors should have a clear understanding of that relationship.
