bond 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.