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The risk level and potential profitability of bond funds can also be assessed according to the duration of the fund's bond portfolio. Basically, duration shows the length of time during which the borrower makes payments to the lender. For example, the duration of a short-term bond whose interest and principal are paid back at the same time after six months is six months. Bonds of longer duration are riskier, because when interest rates rise, their prices drop more than the prices of short-term bonds. The reason for this is that after interest rates rise, investors no longer wish to buy bonds that are earning less interest at their former prices and these bonds must become cheaper in order to make their rate of return competitive again. For example, a bond fund whose average duration is eight years loses 8% of the value of its portfolio if interest rates rise 1%. The weighted average duration of the significantly less risky Swedbank Fixed Income Fund, which can be found in the general data part of the fund review, was only 216 days as of 30 June 2007. This means that the fund portfolio would lose 1.5% of its value if interest rates rose by 1%. A 1% rise in interest rates is extremely high in the European credit markets and would definitely not happen overnight.
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