Committing to Bonds in a very Bond Pay for.

 Buying bonds by owning a bond fund is simple compared to selecting individual bonds. Few average investors can analyze bonds, so a large proportion investing in bonds purchase a mutual fund called a bond fund, and let professional money managers make the selections for them. Hence, whenever you own a bond fund you have part of a professionally managed portfolio of bonds, often called an income fund. invest bonds

Don't get confused. Buying bonds or an income fund has little in common with buying U.S. Savings Bonds. The government guarantees that you will not lose profit savings bonds. There is no market risk in these savings products. When investors talk about bonds they are not discussing savings bonds.

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

To be able to understand investing in bond funds, you first should find out some bond basics. Let's turn our attention now to a simplified bond example, a brand new issue of a very basic corporate bond.

ABC Corporation decides to improve a sizable amount of money to expand their operations. As opposed to selling stock to the general public, they decide to market bonds. In other words, they will borrow money from investors. Each bond has an experience value or initial bond price of $1000. The coupon rate will soon be 6%. They are high quality bonds and mature in 2039. Once all the bonds can be bought ABC gets their money, and these bonds start to trade in the bond market.

If you buy an ABC bond for $1000, ABC promises to pay you $60 each year, or 6%, for as long as you have it until 2039 once the bond matures. In those days the bond owner gets the $1000 back, and the bond no more exits. Until that time the offer never changes. ABC promises to pay the bond owner $60 each year, period.

You as a bond holder are not required to put up the bond until 2039. You are able to 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 rise and they can go down. In other word, a $1000 bond is certainly not worth $1000 after it is issued. Hence,there's market risk involved when investing in bonds.

Now picture an income fund dedicated to a portfolio of bonds just like ABC bonds. Since this bond fund holds a wide variety of different bonds, investors will not need to concern yourself with 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 aware of when investing in bonds and bond funds is of an alternative nature, and this risk is called interest rate risk. Interest rates in the economy fluctuate, but a bond's coupon rate does not. ABC bonds, for example, pay $60 each year, period.

What happens when long term interest rates in the economy rise? 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 each year in interest vs. $60. What do you think investors in the bond market will be willing to fund a 6% bond under these circumstances? Since investors buy bonds for the bigger interest they give, the buying price of our 6% bond will fall like a rock. The bond price won't likely fall in half, however it will soon be heading for the reason that direction.

Interest rates peaked in 1981-82, and have generally been falling since. Despite 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 these investment increases.

But interest rates can not fall forever. If 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 rise 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 using them helping them to achieve their financial goals.