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

  • Pension funds
  • hedge funds

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.
  • Zero-Coupon Bonds

    • A zero-coupon bond (also called a "discount bond" or "deep discount bond") is a bond bought at a price lower than its face value, with the face value repaid at the time of maturity.
    • Treasury bills, U.S. savings bonds, and long-term zero-coupon bonds.
    • The bonds can be held until maturity or sold on secondary bond markets.
    • The impact of interest rate fluctuations on strip bonds is higher than for a coupon bond.
    • Pension funds and insurance companies like to own long maturity zero-coupon bonds because of the bonds' high duration.
  • The Nature of Bonds

    • A bond is an instrument of indebtedness of the bond issuer to the holders.
    • The main categories of bonds are corporate bonds, municipal bonds, and U.S.
    • Bond maturities range from a 90-day Treasury bill to a 30-year government bond.
    • A bond is a form of loan: the holder of the bond is the lender (creditor), the issuer of the bond is the borrower (debtor), and the coupon is the interest.
    • Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure.
  • Market Actors

    • Investors can include: pension funds, insurance companies, mutual funds, index funds, exchange-traded funds, and hedge funds.
    • Hedge funds are not considered a type of mutual fund.
    • An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day.
    • Most ETFs track an index, such as a stock index or bond index.
    • A hedge fund is an fund that can undertake a wider range of investment and trading activities than other funds.
  • 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.
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