Investing in Bonds in a Bond Fund
Investing in bonds through the ownership of a bond fund is easy, compared to individual stock selection. Few investors can use the vouchers, so that the vast majority of investment in bonds to buy an investment fund called the pension fund, and make the professional fund manager to choose for them. Therefore, if you are a pension fund, you own part of a professionally managed portfolio of bonds, often pension funds. Make no mistake. Investing in bonds or bond funds have little in common with the purchase of U.S. savings bonds. The government guarantees that you will not lose money in savings bonds. No market risk in these savings products. When they talk about the rights of investors are not related to savings bonds. A pension fund is sometimes referred to as an income fund and that the main objective is to provide a higher income level than other investments. This dividend fund interest on the obligations of the fund’s portfolio. Parallel to this increase in income by investing in bonds at risk. Bond prices and bond values fluctuate as securities that are traded on the open market like stocks. To understand the investment in fixed income funds, they must first learn some basics of bonds. Our attention is now on a simplified example of bonds, a new link to the main activity.
ABC Company decides to expand a large sum of money for their activities. Instead of selling shares to the public, he decided to sell the bonds. In other words, borrow money from investors. Each bond has a nominal value or price of the original bond of $ 1000. The coupon rate is 6%. These are high quality bonds and maturity in 2039th After all the bonds sold ABC gets its money, and these bonds will begin trading on the bond market. If you buy a bond for $ 1.000 ABC, ABC agrees to pay $ 60 per year or 6%, whereas a properly until 2039, when the loan. At that time back bondholders of $ 1.000, and the link no longer exists. Until then, the deal never changes. ABC promises the owner of U.S. commitment $ 60 per year to pay. They are the holders of bonds are not required to maintain the link until 2039. You can sell it at will in the bond market, or buy more bonds at market prices, if desired. Vary, but beware, the prices of bonds and stock prices. bond prices or values can rise and can be downloaded. In other words, a bonus of $ 1000 is not necessarily a value of $ 1000 after their issuance. Therefore, there is market risk by investing in bonds.
Now imagine an income fund invests in a portfolio of similar obligations ABC. Because the pension fund has a wide range of different obligations, investors do not have a company like ABC refers to the bankruptcy and does not include interest payments when due or pay investors. The fund is broadly diversified. The real danger, you should keep in mind when the investment is in bonds and bond funds of different nature, and this risk is interest rate risk. Interest rates fluctuate with the economy, but do not work, the rate of coupon bonds. ABC-bonds, for example, pay $ 60 per year, period.
What if interest rates rise in the economic long term? It’s simple: the value of existing commitments, that is, bond prices fall. Look at it this way. If interest rates doubled from 6% to 12%, new bonds, investors pay $ 120 per year in interest compared to $ 60. What do you think that investors in the bond market would pay for a bonus of 6% in these circumstances? Investors buy bonds for the interest they offer higher prices, our bond is 6% as a rock fall. The bond’s price is not expected to halve, but it is in this direction. Interest rates reached in 1981-82, and have generally been declining. In contrast to our previous example, sending bond prices lower later. provide investors in bonds and bond interest income or dividend funds, if interest rates fall, the highest increase the value of your investment.
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