Coupon Bond or Bond Fund?

Bond funds and coupon bonds are different investments. If you hold an individual coupon bond to maturity, assuming a default has not occurred, you get back 100% of your principal and a predictable income for the period that you have held the bond, consisting of coupon interest.

Bond funds are professionally managed portfolios that invest in individual fixed income securities. While a number of individual offerings may remain in the portfolio until they mature, there is no single date at which the entire portfolio of the fund will mature. The price at which you will be able to sell shares of a bond fund cannot be known ahead of time. It will be determined by conditions prevailing in that sector of the bond market when you sell your fund.

As a general rule, bonds tend to rise in value when interest rates fall and fall in value when interest rates rise. Usually, the longer the maturity, the greater the degree of price volatility. The inflation causes the price of a bond to drop. A bond is a claim to the receipt of a fixed amount of money at maturity. Considering the inflation, the payoff on the maturity date will not be worth as much at that time in the terms of real dollars as its nominal value indicates.

Investors use bonds as part of a larger portfolio because of their stabilizing properties on the whole portfolio. The major factors in deciding between owning a bond fund versus individual bonds are diversification, convenience, costs and control over maturity. In order to avoid mistakes and make the right choice, talk to your financial advisor first.