Types of Taxable Bond Funds

There are times when investors want the stability of a bond, but don’t want to hold it to maturity, nor do they want to bear the risk of the bond being called. In order to achieve this, they invest in bond funds. These funds are made up of the different types of taxable bonds, and may be more heavily weighted in one type of bond over another. Since the investor is a shareholder of the fund, rather than an individual bond, there are no fixed maturity dates. The investor, therefore, may hold onto the fund in perpetuity, while the underlying bonds mature and the fund purchases new ones.

U.S. TREASURY BOND FUNDS. Investors looking for an investment that is relatively safe and income producing, look towards U.S. Treasury bond funds. These funds invest primarily in U.S. Treasury bonds, and are, thus, considered to be relatively safe. The underlying bonds have a variety of maturity dates, and due to the nature of Trea- sury bonds, they aren’t callable. This means that the bond fund will receive the full amount of interest plus principal, which it will then pass on to the shareholders. These funds help provide security and stability for the investor’s portfolio.

U.S. GOVERNMENT INCOME FUNDS. These funds attempt to achieve a higher yield by investing in different types of government securities, including Treasury bonds and notes and other federally guaranteed securities.

GINNIE MAE FUNDS. These funds invest primarily in government- backed, mortgage-backed securities. Ginnie Mae is the common name for the Government National Mortgage Association. CORPORATE BOND FUNDS. Most corporate bond funds try to invest in high-quality bonds issued by diverse companies who are raising capital. The associated risk with these funds is based upon the bonds’ issuing companies’ creditworthiness. These bonds are normally callable and may have any length of maturities.

HIGH-YIELD BOND FUNDS. High-yield, or junk, bonds try to earn a higher rate of return by investing in bonds with a low credit rating. The lower the credit rating, the riskier the bond is. However, these bonds are known to pay a much higher interest rate than those corporate bonds with high ratings. These bonds often go into default, where the issuer can no longer pay the interest. By investing in higher-risk bonds, high-yield bonds hope to achieve higher returns for their shareholders. The higher the risk, the greater the potential payout.

INCOME-BOND FUNDS. These bonds try to provide current income for their shareholders by investing in a combination of corporate and government bonds.

INTERNATIONAL BOND FUNDS. International bond funds invest in the bonds of foreign governments, corporations, or both. They do not hold any bonds from the United States. These funds are subject to price fluctuations based upon the prices of the underlying bonds, which are expressed in that country’s currency. For instance, if within an international bond fund, there is a bond from Great Britain, the price for the bond will be expressed in pounds, not dollars. Thus, these funds have three inherent risks: (1) financial risk, (2) interest rate risk, and (3) currency risk. As the world’s different currencies fluctuate against the U.S. dollar, the prices of the bonds, as converted to dollars, will change. These bonds also give the investors the chance to partake, indirectly, in foreign currencies and diversify their portfolios as such. Sometimes, the asset allocation model will recommend some foreign currency investment.

GLOBAL BOND FUNDS. Global bond funds are just like international bond funds, and are subject to the same types of risk associated with international bond funds. However, global bond funds may invest in the bonds of both the U.S. government and U.S. corporations.