From
Your Perspective:
Making sense of your 401(k) investments
Bond funds
When you put money into a
bond fund,
you buy shares
in the fund, and the fund manager invests your money by buying
bonds issued by corporations, governments, or government agencies.
In most cases, when you own an individual
bond, the rate of
interest
you earn remains the same for the term of the loan. But with a
bond fund, every bond in the fund — and there may be dozens
— is likely to be paying interest at a different rate. In
addition, the fund’s portfolio of bonds is always in flux,
so that the collective rate the fund earns on one day may not
be the same as its collective rate the next.
The
longer a bond fund’s average
maturity,
the more sensitive it is to changes in interest rates.
Thus, a long-term bond fund has greater potential
to generate high total returns when rates are declining,
and low total returns when rates are rising.
High-yield,
or junk bond, funds are generally the most
volatile.
Their interest rates are high, which can boost total
return, but their underlying investments can decline
precipitously in value.
