I apologize for the dumb question as I am new to investing in bond funds. Does the fund price automatically decrease when the monthly dividend is issue? Also, same question when capital gains is issued? Thanks
Here's a simple way to look at it : NAV is the net assets (i.e., assets - liabilities) divided by total number of shares. The interest that must be paid to the VFIIX holders is a liability. To pay the liability, the assets must decrease by a corresponding amount. So the numerator of the NAV equation stays constant, and of course the denominator (# of shares) did not change directly as a result of paying the monthly dividend. HOP
Now to answer your question about the monthly interest dividend, given the background that has been provided. If you have looked at the historical prices, you would see that the NAV typically did NOT decrease after the monthly interest dividend was paid. Why? From an accounting perspective, the interest owed to you as the bond fund holder is accrued each day, and paid out at the end of the month (or whenever someone sells their shares). But this interest dividend is not carried in the NAV by Vanguard. HOP
Found this explanation/example from a website: When a distribution is made on a fund’s “reinvest date” (which is also known as ex-date, or ex-dividend) the Net Asset Value (NAV) goes down by the same amount. However, even though the NAV may go down, unless there is a change to the fund’s underlying securities, the value of your account will not be affected.
For example: Assume you own 100 shares of a fund with an NAV of $10, your investment is worth $1,000. The fund declares and makes a distribution of $0.10 per share. On the reinvest date, the fund's NAV drops to $9.90 per share, assuming the shares did not change in value due to market conditions. If you reinvest your $10 distribution (100 shares x $0.10 per share), you buy an additional 1.01 shares at $9.90 per share. The value of your account is still $1,000 (101.01 shares x $9.90 per share).
If you do not reinvest your distribution, the value of your account would be worth $990 (100 shares x $9.90 per share). But you would not have lost any money because you will receive the $10 distribution, either by check, directly into your bank account or invested in another Domini Fund, however you choose. HOP
You can see the actual results yourself using the "historical prices" feature of the yahoo stock board. If you check the 12/29/11 row, you will see that VFIIX paid a $0.128 end of year distribution (EOYD). On 12/28/11, the pre-adjusted closing price (PACP) was $11.18. On 12/29/11, the PACP was $11.06. So the NAV dropped $0.12, which is in line with the distribution amount. Similarly, on 12/30/10, the PACP on 12/29/10 was $10.95, the EOYD was $0.231, and the 12/30/10 PACP was $10.71, which is again what one would expect. HOP
It could but Vanguard does have a minimum time to hold this fund in order to avoid such volatility. I believe their hold time is 30-days. They also seem to keep track of folks who frequently trade shares. Restrictions should be on the prospectus. FYI though, I think the drop overnight was one cent but the divy was ~three...