| Bond funds make bond investing easy for | | | | bond fund investing basics. So, here's the rest of |
| average investors. Investing in bonds profitably | | | | the story. Remember, when you own bond funds |
| could soon be a different story. The hazards of | | | | you have an investment in bond securities. |
| bond investing follow in no uncertain terms, in plain | | | | Whatever happens in the bond market and to the |
| simple English. | | | | value of the bonds in your fund portfolio |
| The attraction of bond investing is that bonds pay | | | | translates to gains and losses for you. |
| the investor higher interest income than other | | | | Let's say you own shares in the most popular |
| investments. These securities represent long term | | | | type of bond fund, an intermediate-term fund of |
| debt to the issuer, which is usually a corporation | | | | high credit quality. The average bond security in |
| or government entity. Example: XYZ issues bonds | | | | the portfolio matures in a little less than 10 years. |
| priced at $1000 each which pay $60 a year in | | | | The fund is paying a dividend yield of 6%, and |
| interest and mature in 20 years. At maturity | | | | you're happy with it vs. the 2% interest you |
| whoever owns that bond security gets the $1000 | | | | might get from your bank. What could go wrong? |
| back and the security no longer exists. | | | | Interest rates could go up. A couple of years |
| Throughout its 20-year life, the bond trades in the | | | | from now new bond issues could be paying $90 a |
| secondary market and its price fluctuates. Any | | | | year in interest income for a $1000 bond, which |
| investor who owns it can sell at will at the market | | | | translates to 9%. What do you think will happen |
| price; and an investor in search of income can buy | | | | to the price (value) of a 6% bond when investors |
| it in the bond market. Note this: the $60 a year in | | | | can get 50% more interest income in new bond |
| interest income is FIXED for the life of the bond | | | | issues (9% vs. 6%)? The price will fall substantially |
| and never changes. This gives you a 6% yield. | | | | for all existing bonds, including those in your bond |
| Now you know bond investing basics. Few | | | | fund. |
| average investors actually invest in individual bond | | | | Let's put it this way: If you pay $667 for a bond |
| issues like XYZ above. Instead, millions of | | | | that pays $60 a year in interest income you earn |
| Americans get into bond investing the easy way | | | | a current yield of 9%, because 9% of $667 |
| with bond funds. These funds pool investor | | | | equals $60. If 9% is the new going rate, any |
| money and manage a collection (portfolio) of | | | | interested investor can either buy a new issue to |
| these securities for their investors. When you | | | | get it or pay a reduced price (get a discount) for |
| invest money in a bond fund your money buys | | | | an existing issue in the bond market. Remember, |
| shares, and you then own a small part of a large | | | | bond prices fluctuate as these securities trade in |
| portfolio of bonds. The fund actually owns the | | | | the market. |
| securities and buys and sells bonds on an ongoing | | | | Don't dwell on the math if it confuses you, and |
| basis. They pass the interest income on to | | | | please note that the above example suggesting |
| investors in the form of dividends, and usually | | | | that a 6% bond originally issued for $1000 paying |
| charge less than 1% a year for their services. | | | | $60 a year could fall to a value of $667 if rates |
| As a bond fund investor you can have your | | | | for new similar bonds increase to 9%. It's an |
| interest income send to you periodically or you | | | | oversimplification to emphasize this concept: the |
| can have these dividends reinvested automatically | | | | most important thing you must know about bond |
| to buy more fund shares. The value or price of | | | | investing these days is that bond investors will |
| your shares will fluctuate along with the price | | | | lose big when interest rates go up significantly. |
| fluctuations in the individual bonds held in the | | | | When interest rates go up bonds and the bond |
| portfolio. You can buy or sell fund shares on any | | | | funds that invest in them lose money, and so |
| business day. You're not locked in. Now you know | | | | does the investor. |