mutual funds with bonds: how is share price calculated?

Factual Questions
1

I’ve always assumed that the share price for a mutual fund composed entirely of equities (e.g. VFINX) varies strictly with the share prices of the stocks composing the fund (along with a time-based drag factor that accounts for the expense ratio).

Is that correct? Assuming it is, my real question is this:

how is the share price calculated for a mutual fund containing bonds (e.g. VBLTX)? Unlike an equities-based fund, there are no “share prices” for the bonds that comprise this sort of fund. So what is the basis for calculating a fund share price at the end of each trading day?

2

The fund issues x number of shares - the total asset value of the fund is y - the price per share is:

Y/x

It really is that simple

Then if you buy shares - you send them your money - they create extra shares and buy the required equities/bonds to get up to that level. The reverse if you sell.

3

Oh - and if your confused as to where they get the value for the bonds - it would be what the bond sells for on the secondary market - just like stocks there is a bid and ask price (and a last traded at price).

My guess is they usually are using the last traded at price.

4

Yes, there are. Bonds are traded on secondary markets (i.e., markets where holders of existing bonds can sell them to prospective buyers, as contrasted with primary markets where newly issued bonds are sold) just like equity shares.

What are the factors that determine bond prices on the secondary markets? As with equities, it’s supply and demand - the price is based on whatever holders are willing
to sell for and whatever buyers are willing to buy at. The considerations which come into play when investors determine which price to pay are mostly the following two:

  1. The creditworthiness of the issuer: If the financial situation of the issuer deteriorates, this will increase the risk of default, and prices of the already issued bond drop.
  2. Market interest rates: In the case of fixed-rate bonds, when market rates drop, the value of an already issued bond paying a higher coupon (the coupon is the amount of regular interest payments made on the bond) rises. Concersely, if market rates rise, the value of an already issued bond that pays an older, lower rate falls. This is, of course, not true for floating bonds, where the coupon is automatically adjusted to going market rates.