Bonds and Bond Funds

This post defines what is a Bond and Bond Funds

What is a Bond?

A bond is a debt instrument issued by governments and companies to raise required financing. A bond is an agreement where an investor lends money for a definite period, in return for periodic interest/coupon payments and the original amount paid back at the expiration of the period. The larger the risk associated with the entity borrowing the funds, the larger will be the compensation for the investor in the form of interest/coupon payments.

What is a Bond Fund?

A bond fund is a financial mechanism made up of several distinct bonds which may share common characteristics like credit quality, interest rate sensitivity and maturity. The characteristics of the selected bonds will entirely depend on the objective of the bond fund and strategy of the fund manager. These are outlined in the fund prospectus.

A major advantage of bond funds over individual bonds is wide diversification, meaning that an investor can participate in owning over hundred different bonds with the purchase of even one unit in a particular single bond fund. Diversification in a bond fund also enables an investor to achieve similar/higher returns with much lower risks than through investing in a single bond.