| In today's crazy interest rate world, investors are | | | | betting that the issuer will continue to pay $50 per |
| searching high and low for more interest income. | | | | year in interest. That produces a current yield of |
| One place to find it is in high-income bond mutual | | | | 10% to the investor who bought the bond for |
| funds called HIGH YIELD bond funds. Let's look at | | | | $500 ($50 divided by $500). |
| June of 2009. If you required a real high degree | | | | The average investor is not capable of analyzing |
| of safety, you could get a bit over 2% a year if | | | | individual bond issues to find a promising high yield |
| you tied your money up for 5 years in a bank | | | | opportunity. Professional money managers who |
| CD. If you were willing to accept a moderate level | | | | manage bond funds are (hopefully). If you decide |
| of risk, many bond funds were yielding (paying) | | | | to opt for high yield bonds go with a high yield |
| 5% or 6%. High yield bond funds were also | | | | bond fund. Here you will be invested in a |
| available from large mutual fund companies that | | | | diversified portfolio of these bonds, which lowers |
| offered yields of 10% and more. | | | | your risk of default considerably. If a couple bonds |
| How can a bond fund pay interest rate yields of | | | | out of a portfolio of hundreds go bad, no big deal. |
| 10% when interest rates are near historical lows? | | | | Just remember, there is no free lunch in the |
| These high yield bond funds invest in lower-quality | | | | investment world. High yield bonds and bond funds |
| bonds, sometimes referred to as "junk". Hence, | | | | involve risk. Their price or value fluctuates, |
| the term often used to describe these mutual | | | | sometimes as much as stock prices do. Their |
| funds is JUNK BOND FUNDS. At the one extreme | | | | advantage is obvious ... high income. |
| you have high quality "investment grade" bonds | | | | Here are two tips for those of you tempted by |
| and bond funds. These are issued by entities with | | | | these high income investments. First, consider |
| very high credit ratings, and the risk of default to | | | | no-load high yield bond funds with low expense |
| investors is low. | | | | ratios. There is no sense in paying a sales charge, |
| At the other extreme you have junk bonds, | | | | or high expenses. This works only to lower your |
| where the issuer has a poor credit rating and | | | | return. |
| default is a real possibility. If a corporation gets | | | | Second, invest in increments rather than in one |
| into financial difficulty, for example, it might default | | | | lump sum. For example, let's say you want to |
| and quit paying interest to its bond holders. If | | | | invest $50,000 into a high yield fund. Start with |
| things go from bad to real bad for the company, | | | | $10,000 in the high yield bond fund and $40,000 in |
| investors may fear that they will default and not | | | | a money market fund with the same fund |
| be able to pay bond owners back as agreed | | | | company. Then have them set you up so that |
| when the bonds mature. | | | | $1000 to $2000 flows each month from the |
| Either way, risk of default is real, and sends the | | | | money fund to your bond fund until all of your |
| price or value of a junk bond down. The lower | | | | money is in the junk bond fund. |
| the price of a junk bond, the higher the yield. For | | | | Using the above strategy, you lower the risk of |
| example, you buy a bond with a 5% coupon | | | | investing too much at the wrong time. Plus, your |
| interest rate for $1000. A few years later the | | | | money buys more shares when the fund price is |
| bond heads toward junk status and its price | | | | lower. This is called DOLLAR COST AVERAGING, |
| declines to $500 in the bond market. | | | | and is an effective investor tool. |
| An investor who buys this bond for $500 is | | | | |