Your plan sets aside $2,000 for a bill due in six months. Another $6,000 is meant to steady the portfolio and pay variable income over five years.
Two bond funds show the same duration. One quotes a 3.5% yield; the other quotes 5.0% but leaves its credit mix blank. Does the higher yield make it better for either job?
This is an assumed US-dollar case, with prices and fund terms set at day 0. Keep the dollar assignments unchanged; the decision is which holdings fit them.
1. Write the job and the deadline
The overall allocation is already set. The $20,000 has three jobs:
- $12,000 in stocks. Already assigned.
- $2,000 for the bill. Ready to spend in six months.
- $6,000 in bonds. Ongoing exposure over a five-year planning horizon.
The $6,000 is intended as bond ballast: bonds held to soften portfolio swings. It also supplies income, the cash holdings pay you. Bonds can still fall alongside stocks.
Dry powder means money kept available for a future use or adjustment. The bill reserve already has a use, so it cannot double as spare money for a portfolio change.
The bond job requires high credit quality, with no below-investment-grade corporate debt. The plan also allows up to a $150 price drop in the rate check. Judge the candidates on credit quality, rate sensitivity and access.
A deadline tells you when cash must arrive. A planning horizon tells you how long you intend to invest.
2. Fit the payment to the bill
The US Treasury bill candidate costs $1,980 and promises $2,000 at maturity, leaving $20 in bank cash. Here, the provider has confirmed that all $2,000 will be spendable two business days before the expense is due.
That scheduled Treasury payment covers the expense, provided Treasury pays. You do not need to predict the bill's selling price.
The timeline puts spendable cash ahead of the expense while the separate fund stays invested.
Move the expense before maturity and you need a new plan: an early sale can return more or less than $2,000. The spare $20 cannot cover every possible shortfall.
Ready cash means dollars spendable when the bill is due; cash and money market funds has optional detail on deposit protection and transfer timing.
3. Find the missing fund field
A and B are conventional open-end bond funds. Both have a 0.10% annual expense ratio, no sales loads, and variable distributions. Their providers have confirmed access terms that fit the five-year job.
These day-0 figures use effective duration and the US 30-day SEC yield.
| Fund | SEC yield | Duration | Credit mix |
|---|---|---|---|
| A | 3.5% | 2.0 years | Treasuries |
| B | 5.0% | 2.0 years | Missing |
Wait for its credit mix. A blank is not evidence of either safety or danger.
The disclosure arrives: B's portfolio by value is 80% below-investment-grade corporate debt and 20% investment-grade corporate debt. That puts 80% × $6,000 = $4,800 into debt this plan excludes. B fails the credit check; A's Treasuries pass.
Lower-rated corporate debt can offer higher yields at the cost of greater default risk. Higher yield can be payment for risk the plan was designed to avoid.
The quoted yields already deduct the 0.10% expense ratio; subtracting it again would count the fee twice. They do not promise future payouts.
At year five, you would sell either fund's shares at their value then; neither promises a $6,000 payment.
4. Put dollars on rate risk
Use duration for a rate check. Suppose relevant yields rise together by 1 percentage point, with other price drivers unchanged. A duration of 2 gives −2 × 1 = −2%, an estimated price decline.
That is about $120 on $6,000: an immediate price estimate before income and other changes.
Both funds pass the $150 limit for this shock. Passing one check does not erase B's credit problem. Defaults, wider credit spreads or unexpected changes in payments can add losses; $120 is not a maximum loss.
The five-year plan sets no deadline for recovering a loss.
5. Keep an answer you can revisit
Keep a short decision record:
- The bill reserve fits. The $2,000 payment and confirmed access meet the deadline. Recheck if the expense moves earlier or access changes.
- A fits this bond job. It passes the credit and rate checks, with variable income and an unknown future sale value. Recheck if its holdings, duration or access change, or your loss tolerance changes.
- B fails the credit rule. A changed credit requirement would reopen the comparison. A higher yield alone changes nothing.
A plain bond fund and a cash arrangement can complete this plan. The useful answer includes both the fit and the reason to reconsider it.
The 2022 bear market offers an optional historical application.
In short
- Money with a bill date needs spendable cash by that date.
- A higher yield cannot fill in missing credit information.
- Equal duration can hide very different credit risks.
- A five-year fund holding plan does not promise your starting money back.
- A useful decision states what fits and what would change the answer.