Читать книгу Mutual Funds For Dummies - Eric Tyson - Страница 19

Bonds are the most common lending investment traded on securities markets. Bond funds also account for about 20 percent of all mutual fund assets and about 15 percent of all exchange-traded funds. When issued, a bond includes a specified maturity date — the date when your principal is repaid. Also specified when a bond is issued is the interest rate, which is typically fixed (meaning it doesn’t change over time).

Bonds, therefore, can fluctuate in value with changes in interest rates. If, for example, you’re holding a bond issued at 2 percent and the market level of interest rates increases to 4 percent for newly issued similar bonds, your bond will decrease in value. Why would anyone want to buy your bond at the price you paid if it yields just 2 percent when they can get a similar bond yielding 4 percent somewhere else? (See Chapter 12 for more information.)

Bonds differ from each other in the following ways:

 The type of institution to which you’re lending your money: Institutions include state and local governments (municipal bonds), the federal government (Treasuries), mortgage holders (the Government National Mortgage Association, or GNMA), and corporations (corporate bonds). Foreign governments or corporations can also issue bonds. The taxability of the interest paid by a bond is tied to the type of entity issuing the bond. Corporate, mortgage, and foreign government bond interest is fully taxable. Interest on government bonds issued by U.S. entities is usually free of state and/or federal income tax.

 The credit quality of the borrower to whom you lend your money: The probability that a borrower will pay you the interest and return your entire principal on schedule varies from institution to institution. Bonds issued by less-creditworthy institutions tend to pay higher yields to compensate investors for the greater risk that the loan will not be fully repaid.

 The length of maturity of the bond: Short-term bonds mature in a few years, intermediate bonds in around 5 to 10 years, and long-term bonds within 30 years. Longer-term bonds generally pay higher yields, but their value is more sensitive to changes in interest rates.