Bond Funds

October 4, 2023

There are multiple types of bonds funds an investor can choose from. These funds can vary in risk and sectors in which they invest in. there are two main bond rating services, Standard & Poor’s, and Moody’s. Standard & Poor’s ratings range from D to AAA, and Moody’s ranges from C to Aaa. Two popular bond funds are investment-grade and high-yield.

Investment-grade bond funds are primarily made up of investment-grade corporate bonds. This means the fund is buying bonds with a rating of BBB or Baa, or higher. These funds can also include U.S. Treasury and mortgage-backed securities. The bond maturities within investment-grade funds range from 10 to 30 years. These investment-grade bonds are less likely to default because they are issued by strong companies or the government. These funds appeal to investors who want higher income than they would receive from a U.S. government only bond fund and want a higher assurance that interest and principal will be paid when due.

High-yield bond funds, commonly known as junk bond funds, invest in risker bonds. these funds buy bonds with ratings BBB or Baa, or lower. They also invest in nonrated bonds. These bond funds appeal to investors who are looking for a higher return than investment-grade bond funds. The higher yield the investor will receive is due to the higher chance the bond will default. This is because the companies issuing these bonds are not as financially strong. These bond funds tend to appeal to investors willing to take more risk when investing in the bond market.