What Information you need to know when Investing your Money into a Bond Fund

 A bond fund investment (Fixed – income securities 1)  include corporate, municipal, U.S. Treasury, mortgage securities (“Mortgage loans issued or guaranteed by government agencies such as the Government National Mortgage Association (Ginnie Mae),  Federal Home Loan Mortgage Corp. (Freddie Mac), and Federal National Mortgage Association (Fannie Mae) 2) and other debt securities selected by a fund’s management. A bond fund may have a diversified portfolio of securities (combination of corporate, municipal, and Treasuries) limiting risk and stream levels of income. 2 “Investors should note that U.S. government bonds are considered to be of the highest credit quality and are not subject to ratings.” 11

    Fixed income securities usually pay interest dividends monthly (Amount distributed may fluctuate depending upon how well the fund is managed). Normally realized capital gains are distributed by the end of the year. Many bond funds offer investors the option to reinvest their income and capital gain distributions or credit their account. 12

   Assessing the risk for investing in a bond fund, starts by evaluating (reading) the bond fund’s yearly and quarterly statements: Listing the portfolio of investments, purchasing and selling of securities, income, realized capital gains (or losses), and cost to administer the fund. Corporate bonds are graded by the level of risk by credit rating agencies such as Moody’s and Standard & Poors, assessing the risk to pay dividends, principal and evaluating potential risk of defaults. When a bond fund pays high dividends (include interest payments) compared to Certificate of Deposits and treasury securities, fund investments generally own riskier debt securities, not always return the same level of income in the future. Bond funds that own callable fixed income securities may be callable before the maturity date, limiting the duration of time to collect the distributed interest or distributions to shareholders. When bond funds own lower graded corporate bonds (“a high risk, non-investment – grade bond with a credit rating, usually BB or lower”  Also, referred to a s junk bonds 4

  Bond funds are Open – End, Closed – End or Exchange Traded Fund (ETF) regulated by the Securities and Exchange Commission:

   An Open End Fund priced according to its net asset value, assessed by the end of the trading day. Sometimes an open end fund requires a minimum investment. Investors pay a commission to purchase and sell the fund. An open end fund may require investors to pay a management fee or other additional charges (Referred to as load). Often open end funds will allow investors to reinvest their dividends and capital gains without any charges. 6 An Open – End Fund may belong to family of mutual funds, such as Vanguard, Gabeli, Prudential, Putnam and others.

   A closed End Fund priced above or below its net asset value. Majority of closed end funds are trading on the New York and American Exchange. When a closed end fund trades below its net asset value referred to as a ‘discount’: On paper the fund is worth more upon liquidation than the current traded value. When a closed end fund trades at a ‘premium’ the current market value of fund is worth more than the actual net asset value upon liquidation. When purchasing and selling a closed end fund investors only pay a commission to the broker, no other fees or charges are incurred. Closed end funds typically offer the option to reinvest dividends and capital gains, without any charges. 7

  Exchange Traded Fund (ETF) similar to closed end funds, however the net asset value typically within one percent of the current trading value. During the downturn of the financial markets in 2008, fixed income ETF’s had traded premiums two or three percent of their net asset values. Purchasing and selling an ETF, investors pay only a brokerage commission, and receive any dividends / capital gain distributions. 8

    Investing in a bond fund, especially a closed end fund requires less money, than purchasing an individual bond. A diversified bond fund limits the risk during interest rate changes and inflationary times. 10


 1.) Investing in Bonds and Bond Funds – http://www.money-zine.com/Investing/Investing/Investing-in-Bonds-and-Bond-Funds/

 2.) Bond Fund – http://en.wikipedia.org/wiki/Bond_fund

 3.) junk bond – http://www.investorwords.com/2686/junk_bond.html

 4.) Bond Investing – http://www.scottrade.com/investment_services/bond_investing.asp

 5.) Treasury Inflation – Protected Securities (TIPS) – http://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm

 6.) Open – end fund – http://en.wikipedia.org/wiki/Open-end_fund

 7.) Closed-end Fund – http://en.wikipedia.org/wiki/Closed-end_fund

 8.) Exchange – Traded Fund – ETF –  http://en.wikipedia.org/wiki/Closed-end_fund

 9.) Interest – rate risk & bond funds –  http://en.wikipedia.org/wiki/Closed-end_fund

 10.) Credit Rating Agency (CRA) and Credit Ratings – http://investing-school.com/definition/credit-rating-agency-cra-and-credit-ratings/

 11.) Bond Fund – http://www.investopedia.com/terms/b/bondfund.asp?partner=worldnow

 12.) Tax Implications of Owning Bond Funds and Individual Bonds:   http://personal.fidelity.com/products/fixedincome/fitaximplications.shtml