Investigating Bonds within the Bond Cash.

 Purchasing bonds by owning a bond fund is simple in comparison to selecting individual bonds. Few average investors can analyze bonds, so a large proportion purchasing bonds buy a mutual fund called a bond fund, and let professional money managers make the selections for them. Hence, when you own a bond fund you possess part of a professionally managed portfolio of bonds, often called an income fund. bonds to invest in the UK

Don't get confused. Purchasing bonds or an income fund has little in keeping with buying U.S. Savings Bonds. The government guarantees you will not lose money in savings bonds. There's no market risk in these savings products. When investors speak of bonds they're not referring to savings bonds.

A bond fund may also be labeled as an income fund, because the principal objective is to supply higher income vs. other investments. These funds pay dividends from the interest earned on the bonds in the fund portfolio. Along with this particular higher income, purchasing bonds involves risk. Bond prices or values fluctuate because bonds are marketable securities that trade in the open market, much like stocks do.

In order to understand purchasing bond funds, you first need to learn some bond basics. Let's turn our attention now to a simplified bond example, a fresh issue of a really basic corporate bond.

ABC Corporation decides to boost a large sum of money to expand their operations. Rather than selling stock to the public, they decide to sell bonds. In other words, they'll borrow money from investors. Each bond has a face value or initial bond price of $1000. The coupon rate will soon be 6%. These are top quality bonds and mature in 2039. Once all the bonds are sold ABC gets their money, and these bonds begin to trade in the bond market.

If you buy an ABC bond for $1000, ABC promises to cover you $60 annually, or 6%, for so long as you possess it until 2039 once the bond matures. During those times the bond owner gets the $1000 back, and the bond no more exits. Up to that point the deal never changes. ABC promises to cover the bond owner $60 annually, period.

You as a bond holder are not required to hold the bond until 2039. You can sell it at will on the bond market, or buy more bonds at market price if you wish. But beware that bond prices fluctuate, as do stock prices. Bond prices or values can go up and they can go down. In other word, a $1000 bond is not necessarily worth $1000 after it is issued. Hence,there's market risk involved when purchasing bonds.

Now picture an income fund dedicated to a portfolio of bonds similar to ABC bonds. Because this bond fund holds a wide variety of different bonds, investors need not be worried about a business like ABC going broke and not making interest payments or not paying investors back upon maturity. The fund is broadly diversified.

The true risk you need to be conscious of when purchasing bonds and bond funds is of an alternative nature, and this risk is known as interest rate risk. Interest rates in the economy fluctuate, but a bond's coupon rate does not. ABC bonds, as an example, pay $60 annually, period.

What happens when longterm interest rates in the economy go up? Simply this: the worth of existing bonds, put simply bond prices, go down.

Consider it this way. If interest rates double and go from 6% to 12%, new bonds will soon be paying investors $120 annually in interest vs. $60. What you think investors in the bond market would be willing to cover a 6% bond under these circumstances? Since investors buy bonds for the higher interest they give, the buying price of our 6% bond will fall just like a rock. The bond price will not likely fall in two, however it will soon be heading because direction.

Interest rates peaked in 1981-82, and have generally been falling since. Unlike our above example, falling interest rates send bond prices higher. Investors in bonds and bond funds get income from interest or dividends when interest rates fall, plus the worth of the investment increases.

But interest rates can not fall forever. When they do head north again many folks dedicated to bond funds or income funds will soon be caught standing flat footed. Invest informed and appreciate this: When interest rates go up significantly, the worth of one's bond investments will fall.

A retired financial planner, James Leitz comes with an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.