Frequently Asked Questions
These are questions from real investors phoned in to my past TV show, live. I’ve included them here in the same phrasing used by callers, which is not always the “correct” phrasing(!) But I thought that many other investors who are not bond professionals may be able to relate to the callers’ way of talking.
Some of my answers are quite long and informative. Others are short, to the point, “zesty zingers!” Sorry. No one ever accused me of being too tactful!
Are there any bond funds that you like?
Bond funds are not bonds. A bond is a contract. It is an agreement between an issuer and an investor, and it spells out the duties and obligations of both. If the contract is breached and the issuer does not live up to its obligations, the investor has recourse in court. The bond spells out the date and amount of principal that will be returned to the investor, and the rate of interest (the coupon) that will be paid each year until the bond is redeemed. Failure to do either of these things, or any of the other features of the indenture agreement of the bond issue will result in breach.
A bond fund is equity. It’s ownership. A bond fund is an entity that’s in the business of buying, selling, trading, leveraging, and indexing a group of securities, most of which are bonds. The owners of this entity are the investors, the shareholders. Like all owners, investors are saying, “I am willing to invest my money in this entity for the potential greater return in the future.” Investors buy shares and hope the company or the entity will increase in value so that shares will be worth more in the future.
This is ownership, and part of the risk of ownership is the potential loss of your investment. There is no specified date or amount of principal that will be returned to you. There is no specified stream of income that will be paid to you until your principal is returned. Indeed, there are no contractual agreements at all, because it’s not a contract. You are a shareholder in a bond fund.
Most bond investors are attracted to bonds for their conservative investment features: return of principal and a known stream of income. I advise clients who are attracted to bonds, to buy individual bonds. If they’re interested in potential growth and ownership, go with growth stocks.