Corporate bond funds hold various debt or bond instruments, with different levels of risk and rewards. Domestic funds contain investment grade debt, while junk funds contain low-rated bonds. Global funds offer diversity, while international funds focus on foreign bonds with higher interest rates.
Corporate bond funds are mutual funds that hold a variety of debt or bond instruments. Mutual fund companies create bond funds that focus on a particular type of debt, and most corporate bond funds contain primarily domestic, global, international, or junk bonds. Different types of corporate bond funds have different levels of risk and possible rewards. In general, bond funds are a more conservative investment vehicle than stock funds, because in the event of corporate bankruptcy, bondholders must first be paid off before shareholders can make any claim on the company’s assets. failed.
Domestic corporate bond funds contain primarily investment grade debt issued by companies based in the nation where the fund is registered. Bond rating agencies define investment grade debt as bonds rated at or above a certain grade, such as “BBB.” Bond ratings reflect the financial strength of the company issuing the bond. Companies that issue bonds with high credit ratings are less likely to default on the bonds than companies that issue bonds with low credit ratings. Many national corporate bond funds pay dividends, which are made up of interest payments that the mutual fund company receives from bond issuers.
Junk corporate bond funds contain bonds that are below investment grade. Low-rated bonds can generally be purchased below face value due to the high risk of issuer default. People who buy junk bonds do so in the hope that the bond issuer will honor the debt. Companies with low credit ratings pay high interest rates on debt to attract investors. Bondholders can earn significant gains if issuers maintain regular interest payments and if bondholders can redeem the bonds for face value at maturity.
Many people buy global corporate bond funds because the funds contain both domestic and foreign bonds. Diversity reduces the level of risk investors are exposed to, because global bond funds are not dependent on the continued financial strength of companies in a particular country or region. There are global funds available that contain mostly junk bonds as well as investment grade bonds.
Some investors prefer international bond funds to global bond funds, with the difference that international funds contain only foreign bonds. Companies based in the developing world generally have lower credit ratings than companies based in developed countries, and therefore the bonds of these companies tend to pay higher interest rates. International bond funds often contain bonds from one part of the world, allowing investors to focus their assets on bonds from areas of the world that are experiencing economic growth.
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