Wednesday, April 24, 2019

The Role of bond funds

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The type of bond fund largely depends on an investor’s appetite or rather the financial focus. The bonds being funded by the investor may include municipal, corporate, government, and convertible bonds, alongside any other debt instrument such as mortgage-backed securities.

The Bond fund

Bond fund investors earn money when the underlying asset that they invested in begins to pay back periodic dividends that could be in quarterly, semi-annually, or yearly installments. Investors also earn when bonds appreciate in value before their maturity period because the principal value of the goes up. When the principal is up the bond can be cashed straight away and the investor will earn even without factoring in the dividends.

A primary factor to consider when investing in bond funds is their credit rating. These funds can be rated from high to low depending on the issuer’s credit rating.

Types of Bond Funds

Government bonds

They are considered to be the safest bet in the market because a government can never go broke. The governments have several options including raising taxes or printing more money.

Agency bonds

These are bonds issued by various entities of the government such as the national housing corporations among other government agencies

Municipal bonds

They are primarily issued by state and local governments. In most cases, such bond funds are exempt from state taxes in order to attract more investors so that key state projects such as the public transport system and sewerage infrastructure can be upgraded

Corporate bonds

These are issued by corporate organizations and guaranteed by the issuing company through their assets. They come with a high dividend payout to attract a large pool of investors.

Bond funds can further on be classified into different aspects such as the yield rate which can be high, medium, or low yield. They can also be classified according to their maturity period, short, medium, or long term maturity bond funds.