Q: I am puzzled by the performance of my tax-exempt bond fund. I understand the general relationship between interest rates and the share price of the fund (i.e., rising interest results in reduced share value). However, I would think that the product of share price multiplied by interest rate would remain reasonably constant. Yet in my fund I have seen this product sinking. Can you comment on the factors that may cause this kind of response?

A: If the securities market were a perfect world, you could expect the rules of logic to work reasonably well. But it is not, and there are several factors that can cause the apparently illogical movements in your fund's share price.

One of those factors is the management ability of your fund sponsors. Ideally, in a market of rising interest rates, the fund portfolio should be in short-term securities. Going short term permits the managers to roll over the portfolio rapidly to take advantage of rising rates.

If they had anticipated a drop in rates, then they would have gone long term to lock in the higher rates. When interest rates rise, bonds with longer maturities tend to lose value faster than short-term instruments because investors don't want to be locked in for a long time.

So if your managers guessed wrong and are sitting there with a long-term portfolio, the value of the bonds in the portfolio -- reflected in the share value -- can be expected to go down more than the rise in rates would indicate.

Although the bond market is not as volatile as the stock market, it is still governed to a great extent by emotions rather than by logic. A rising interest rate often generates expectations of further increases.

The combination of sellers anxious to get out of their lower-rate positions and a dearth of buyers tends to depress bond prices, too. This situation is further complicated when municipalities and others who are planning new bond issues rush into the market to try to beat further increases in the rates they have to pay.

Aside from these questions, there is another possible management problem, unrelated, but coincidental, to the increase in interest rates. Your fund managers may have selected bonds that have gone down in value because of something like a lowering of quality assessment by one of the bond rating services.

As you can see, there are elements at work here other than pure mathematics. Among other factors, the things I've mentioned keep your fund shares from responding in a completely logical fashion. I guess it would be nice if you could measure performance on a straight-line risk/reward extrapolation -- but that might take all the fun and excitement out of the market.

Q: I filed individual tax returns for 1984 for my children, ages 6 and 7, on which I included all interest from savings bonds and savings accounts. I included a letter with each return declaring my intention to claim their yearly interest on an annual basis. Under what circumstances will they have to file tax returns again?

A: Three situations would trigger a requirement for either child to file an annual tax return: (1) If the child had gross income for the year of $3,430 or more; (2) if the child had unearned income for the year of $1,040 or more, or (3) if the child had net income from self-employment of $400 or more.

These are the numbers for the 1985 tax year. Because of the start of indexing, the minimums for the first two conditions are slightly higher than they were for 1984. And for the same reason, it is likely that the figures for 1986 and later years will continue to go up. And, of course, tax legislation could change the rules completely.

Barring a major change, the number in the first situation is the total of one personal exemption plus the zero bracket amount (ZBA) for a single taxpayer. The figure in the second is the personal exemption alone -- because a dependent child (one who is claimed as a dependent on his or her parents' return) may not take the ZBA (but may claim legitimate deductions on Schedule A). And the third is based on the requirement for anyone with $400 or more from self-employment to file Schedule SE for self-employment tax (for Social Security credit).