bond funds

(noun)

A bond fund or debt fund is a fund that invests in bonds or other debt securities. Bond funds can be contrasted with stock funds and money funds.

Related Terms

Examples of bond funds in the following topics:

  • Purchase Process

    • Most individuals purchase bonds via a broker or through bond funds.
    • Bonds are bought and traded mostly by institutions like central banks, sovereign wealth funds, pension funds, insurance companies, hedge funds, and banks.
    • Most individuals who want to own bonds purchase bonds via a broker or do so through bond funds.
    • An individual can also purchase bonds by investing in bond funds, which hold baskets of bonds rather than competing for individual bond sales.
    • Most bond funds pay out dividends more frequently than individual bonds.

  • The Common Financial Instruments

  • Sinking Funds

    • The firm may repurchase a fraction of outstanding bonds at a special call price associated with the sinking fund provision (they are callable bonds).
    • The firm can only repurchase a limited fraction of the bond issue at the sinking fund price.
    • Thus the balance sheet consists of Asset = Sinking fund, Liability = Bonds
    • One purpose of a sinking fund is to repurchase outstanding bonds.
    • Describe how a sinking fund operates in regards to a bond issue

  • Bond Prices in an Open Economy

    • In the previous supply-demand graphs, the bond was the good for the market.
    • Consequently, the bond and loanable funds markets yield identical results because we examine the same picture in a different manner.
    • If investors buy bonds, then they have a demand for bonds.
    • Investors become a source of loanable funds because they trade money for bonds.
    • If a businesses or governments sell bonds, then they demand loanable funds.

  • Answers to Chapter 8 Questions

    • Loanable funds and bond market are opposites of each other.
    • Loanable funds indicate the direction the money flows while the bond is the good.
    • If investors buy a bond, they are supplying money, i.e. loanable funds.
    • If a business issues bonds, then it demands money, i.e. loanable funds.
    • Thus, investors would loan their surplus funds abroad to earn the greater interest rate.

  • Advantages of Bonds

    • In finance, a bond is an instrument of indebtedness of the bond issuer to the holders.
    • Bonds are bought and traded mostly by institutions like central banks, sovereign wealth funds, pension funds, insurance companies, hedge funds, and banks.
    • Insurance companies and pension funds have liabilities, which essentially include fixed amounts payable on predetermined dates.
    • Most individuals who want to own bonds do so through bond funds.
    • There are also a variety of bonds to fit different needs of investors, including fixed rated bonds, floating rate bonds, zero coupon bonds, convertible bonds, and inflation linked bonds.

  • Role in Providing a Market for Loanable Funds

    • In the loanable funds market, market clearing is defined as the interest rate/loanable funds quantity where savings equal investment (the amount of capital needed for property, plant, and equipment based investments) .
    • For instance, buying bonds will transfer savers' money to the institution issuing the bond, which can be a firm or government.
    • In return, the borrower's (institution issuing the bond) demand for loanable funds is satisfied when the institution receives cash in exchange for the bond.
    • Loanable funds are often used to invest in new capital goods.
    • When the supply and demand for loanable funds are equal, savings is equal to investment and the loanable funds market is in equilibrium at the prevailing interest rate.

  • Types of Bonds

    • The most common secured bonds.
    • This bears the owner's name on the bond certificate and in the register of bond owners kept by the bond issuer or its agent, the registrar.
    • A term bond matures on the same date as all other bonds in a given bond issue.
    • Serial bonds in a given bond issue have maturities spread over several dates.
    • A bond with nondetachable warrants is virtually the same as a convertible bond; the holder must surrender the bond to acquire the common stock.

  • Redeeming at Maturity

    • The journal entry to record the retirement of a bond: Debit Bonds Payable & Credit Cash.
    • A maturity date is the date when the bond issuer must pay off the bond.
    • Some structured bonds can have a redemption amount that is different from the face amount and can be linked to performance of particular assets such as a stock or commodity index, foreign exchange rate or a fund.
    • Bonds can be classified to coupon bonds and zero coupon bonds.
    • A description of bonds issued including the effective interest rate, maturity date, terms, and sinking fund requirements are included in the notes to financial statements.

  • Information Costs and Bond Prices

    • Information costs influence the bond prices and interest rates.
    • On the other hand, the information costs for new and small companies are high, and therefore, these companies paygreater interest rates when they borrow funds.
    • We depict the bond markets in Figure 3.
    • High information cost bonds are not as attractive as an investment, so investors buy fewer bonds, reducing bond prices and raising interest rates.
    • Therefore, low-information-cost bonds pay a lower interest rate.