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Bonds versus Bond Funds - InfoBarrel
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Bonds versus Bond Funds

By Edited Nov 13, 2013 0 0

Instead of treasury bonds that are yielding approximately nothing right now, in mid 2011, you can buy bonds that pay a lot more interest issued by corporations like Ford or Wal Mart, for example, or by municipal governments that pay you interest which is federal income tax free.  

But you also can buy funds of bonds, so you don't have to put too much money into one company or municipality.  These shares are traded like stocks, and most pay their "coupon" or interest every month.  Such shares cost as little as $10, are very liquid, and sometimes can be hedged against with put options.

One example of a municipal bond fund that invests in mostly high yield (and thus high risk) municipal bonds is NYSE:MAV.  Shares of this fund trade between about $12.30 and $13.30.  Each share pays nine and a half cents per month.  ($0.095).  That doesn't sound like much, but it is more than 8% annually.  And it is federal income tax free.  Your earnings from interest at the bank, stock dividends, or even writing articles online are all taxed at a higher rate than this municipal bond income. 

Municipal Bond Fund Report

If one or even a few of the hundreds of bonds in your fund defaults, the value of your shares will drop and the monthly interest payment might be decreased.  But your investment will not be wiped out.

If you buy a single bond you usually will only receive your coupon interest quarterly, or semi-annually.  Some do pay every month.  With single bonds you might find a higher interest rate, but if the issuer defaults, your entire investment is toast. 

If you want really to earn really high rates, you might consider investment in funds that are taxable, but yield more than 10% and pay monthly.  If you buy and hold these shares in an IRA, you might be able to reinvest the interest for years without paying tax on them annually.  Such funds include NYSE tickers PHK, HAV, or CIF.  These investments, it should be noted, are not for the faint of heart!  Anything pays high interest because it is perceived as very risky, and there is a fair chance of capital loss, not just gain.  Good luck 


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