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What is a bond fund?
A bond fund is a fund made up of bonds and other debt instruments. Like mutual funds, bond funds differ in the type of bonds they focus on. Bond funds can be made up of government bonds, corporate bonds, mortgage back securities, and convertible bonds, to name a few.
Bond funds are often used to provide investors with monthly income. The amount of the monthly payments may vary from month to month since the fund is made up of a variety of bonds.
While bonds mature on a specific date, bond funds are designed so that the bonds mature on a staggered basis to ensure income payments are consistently delivered. As the bonds mature, the fund manager replaces them with other bonds.
While some bond funds are designed to reflect the broader market, other bond funds specialize in specific types of bonds. For example, a bond fund may consist of mainly short-term bonds, bonds from emerging markets or high-yield bonds.
Bond fund example
George and Ann have chosen to invest $100,000 in a bond fund. The bond fund is made up of municipal bonds. These bonds are issued by state and local governments that use the money to fund schools, infrastructure and other projects.
While municipal bond funds offer lower-than-average yields, the income they produce is not subject to federal taxes. Because the couple has chosen to invest in a bond fund versus bonds, George and Ann receive monthly income from the fund. Since the bond is made up of various municipal bonds, their monthly income varies.
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