Bond fund


A bond fund or debt fund is a fund that invests in bonds, or other debt securities. Bond funds can be contrasted with stock funds and money funds. Bond funds typically pay periodic dividends that include interest payments on the fund's underlying securities plus periodic realized capital appreciation. Bond funds typically pay higher dividends than CDs and money market accounts. Most bond funds pay out dividends more frequently than individual bonds.

Types

Bond Funds can be classified by their primary underlying assets:
Bond funds may also be classified by factors such as type of yield or term or some other specialty such as zero-coupon bonds, international bonds, multisector bonds or convertible bonds.

Credit rating

An important property of bond funds is the rating of the bonds they own. Funds may be rated from high to low credit quality. The quality of a fund is the average of the bonds owned by the fund. Funds that pay higher yields typically own lower quality bonds.
Like stocks, the price of high-yield bonds is subject to fashion. For example, in late 2008, many high-yield bond funds were priced at 70 cents on the dollar. In fact, there were few bond defaults and the price recovered. Due to the lower price, investors sold out of high-yield bond funds, having a desire for "safe" cash and bonds.

Bond duration

Funds invest in different maturities of bonds. This may be described by terms like "short", "intermediate", and "long". This affects how the fund value changes with interest rates. Funds invested in longer bonds will have more change. As a general rule, the yield for longer bonds is higher.
Bond funds usually have a target length, such as five to ten years. Thus over time, they need to sell shorter bonds and buy longer bonds to stay in range. A bond fund with such a target length will never "mature" like a specific bond. Some UITs own bonds with a specific maturity date and will terminate at that point.

Advantages over individual bonds

Price charts on bond funds typically do not reflect their performance due to the lack of yield consideration. To accurately evaluate a bond fund's performance, both the share price and yield must be considered. The combination of these two indicators is known as the total return.