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Bond fund management - Coggle Diagram
Bond fund management
Credit rating of bonds
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If the bonds contained within it are for a lower credit scored companies they will be given a low credit rating
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Funds that pay higher returns will typically own lower quality bonds as the rewards have to be greater to repay investors for the increased risk that they are taking
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Different types of bonds
Straight bonds
Pays interest at regular intervals and at maturity pays back the principal, that was originally investments
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The government or company promises to pay the interest on the debt and at maturity pay back the original loan
Convertible bond
A type of bond that the holder can later on convert into a specified number of shares of common stock in the issuing company or cash of equal value
Callable bonds
One where the issuer has the right to redeem the bond before its stated maturity date and the investor has no right of refusal
As a consequence of the prepayment, the bondholder will not receive any more above market interest payments from the investment
Wherever prepayment occurs, it forces investors to reinvest their funds into a market where interest rates are lower than the rates they had previously been receiving from the bond that has been prepaid
Firms issuing callable bonds generally pay higher interest rates for the right to pay back the bonds before maturity
Term bonds
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The issuer of the bond can redeem it at a predetermined price at a specific given time before the bond reaches maturity
Junk bonds
A junk bond can also be known as a high yield bond or speculative bond and credit rated BB or lower because of the high likelihood of default
Typically offer interest rates three to four percentage points higher than safer government issues because of the increased risks that are being taken by investment in them
Angel bonds
Issued by companies which are highly rated from a credit perspective so pay a lower interest rate because of that as the risk associated with them is lower
Duration
Given that the duration can vary whereby the lifetime of a specific bond can be classified as short, medium or long term, funds can invest in different maturities of bonds as part of their overall portfolio within the fund
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As a general rule, the rewards for longer bonds are higher as you are compensated for committing for a longer period as this gives more stability to the issuer
The bond itself will also have a specified duration eg 5/10 years so that investors know how long they will be locked in for
During the lifetime of a fund, the fund manager will need to monitor the portfolio, and where appropriate, sell shorter bonds and buy longer bonds to stay within the specified lifetime of the fund. This means that the bond fund never expires, it keeps on going with new bonds added to keep the fund within its remit until such time as it is due to be wound up.
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Ordinarily pay dividends at a regular frequency and these can higher than some other types of secure funds such as MMF which are mainly cash based and do not offer as great a return
Given the relativity low risk associated with bonds, this makes them an attractive proposition for a fund assets