Just when we think we've seen it all, the financial services industry devises yet another, better mousetrap. This time around, it's an antidote to the problem of bond funds that lose capital value temporarily when market interest rates are on the rise.

Before exploring the virtues of a new investment product, let's review the basics. A bond that matures in, say, five years will lose capital value temporarily if the interest rate paid by the bond has to compete with new, higher rates paid by new bonds in a market of rising interest rates. In this example, if you hold the bond to maturity, at the end of five years you get all of your original money back, but if you tried to sell it after just, say, three years, you would have to reduce the price somewhat so that your old interest rate paid by the bond would represent a rate of return equal to that paid by brand new bonds paying the new higher interest rate.

If that explanation gives you a slight headache, just envision a rope looped over a pulley. If interest rates go up, capital value goes down. If interest rates go down, capital value goes up. As you approach maturity when the bond period ends, none of the changes in interest rates or capital values matter. The game is over.

What I just described applies to a single bond. Most investors buy bonds through mutual funds, so they never have the luxury of holding a bond to maturity. Instead, they own a share of a fund that owns thousands of bonds -- some of which are reaching maturity every day and are being replaced by new bonds that pay a higher or lower interest rate than the average bond in the fund.

If interest rates are rising, it can be distressing to see the capital value of the bond fund declining -- but wait. The interest being collected by the fund each month will be rising. Someone who has directed their bond fund to automatically deposit all interest into their checking account each month will see that dollar amount slowly begin to rise. They can forget about the decline in capital value unless they were planning to sell some shares in the fund to invest in something else.

When interest rates stabilize and stop rising, the capital value of the bond fund will revert once again to its original price that the investor had originally paid. The problem comes when we have a long period of sustained rising interest rates. More money will keep flowing into the checking account each month, but the capital value per share will remain depressed.

A new star in the financial firmament is something called the defined maturity fund. This is a fund that purchases bonds that all have roughly the same maturity date. You can select a fund, for example, that has all of its bonds maturing in 2018 -- five years from now. This gives you the advantage of knowing that a decline in capital value will definitely be corrected as you approach 2018. You will get all your original investment back even as interest rates continue to rise.

The approach is not rocket science and it has been around forever in a concept referred to as a "laddered bond portfolio." This term describes a strategy whereby investors cobble together their own selection of individual bonds that have different maturity dates spread out over time. The advantage is control over the maturity dates. The disadvantage is that smaller investors have trouble selecting and buying bonds efficiently. Some bonds are also harder to sell in amounts of less than $100,000, which rules out this strategy for many of us.

Stepping up to the plate are some new mutual funds such as Guggenheim BulletShares 2018 High Yield Corporate (BSJI), which is actually an exchange traded fund with a current yield of 5.61 percent. Fidelity offers a selection of defined maturity funds that invest in tax-free municipal bonds. Their 2019 version (FMCFX) currently yields a tax-free 2.16 percent, which for some high-earners could be approaching a 4 percent equivalent taxable yield. The advantage here is that bond mutual funds can select and trade bonds more efficiently than an individual investor.

Defined maturity funds are brand new and some have less than $10 million in assets. The concept is sound, however, and would be attractive to anyone who thinks that interest rates will eventually rise -- and keep on rising for quite some time.

But bear in mind the words of Herb Sandler, founder with his wife, Marion, of World Savings Bank. He said that in all his years of banking, he had never met any economist who could consistently predict the future of interest rates. Rather than second-guess what we think interest rates will do, just consider these funds as an option for a portion of the bond portfolio you might want to invest somewhere else within five to 10 years -- regardless of what happens to interest rates.

Stephen J. Butler is CEO of Pension Dynamics. Contact him at 925-956-0505, ext. 228 or sbutler@pensiondynamics.com.