The paper 'Bonds and Bond Mutual Fund" is a great example of a finance and accounting assignment. The logic behind the claim made by the bond mutual fund in the advertisement will require a deeper understanding of the bond mutual funds. Sheffrin ( 2011, p. 147) provides an understanding on how bond mutual fund operates, the classes of bonds that they deal with, the components of return, bond mutual fund yield and its determinants and treatment of capital gains of bond mutual funds is very important. Bond mutual funds Stein ( 2009,pp78-82) argues that bond mutual fund is an investment organization formed to deal with a venture into portfolio comprising mainly of individual bonds.
Investors buy the shares of these bond mutual funds. Each share held by the investors represents a proportional interest of ownership in the collection of bonds consisting of the portfolio of the bond mutual fund. How to bond mutual fund work According to Sheffrin, (2011, p147) “ highly competent professional fund managers use the investors’ money to buy and sell bonds for the investment portfolio which is compliant to the investment goal of the bond mutual fund” .
By contributing their money, the shareholders of the mutual fund can invest a larger number and diversity relative to individual investors. A lot of bond mutual funds have the least amounts of investments that are considerably lower than the principal amount of several individual bonds. For instance, only one Ginnie Mae bond may be worth $25,000 or even more, but an individual investor can put his investments in the majority of GNMA bond mutual funds with as low as $1,000. Classification of bonds that the bond mutual funds companies invest in Strumeyer, (2011 pp. 50 – 63) gives his general view on the classification of bonds in three ways that are, classified on the basis of the issuer, the period of maturity and the quality of the bonds.
The bond mutual funds companies may choose to invest in either one or some mixture of these three types of bonds. Classification under the type of issuer The government of the United States trades its bonds through the treasury in order to raise money to fund the national debt and through different centralized agencies mainly for particular purposes.
Also, Strumeyer, (2011 pp. 50 – 63) argues that local governments and states sell bonds in order to fund development plans, for example, roads, schools, health facilities, airports and bridges. Business entities sell bonds to facilitate a range of reasons such as to fund new investments or to purchase particular equipment. Classification under maturity According to Subramani, 2011, “ maturity is the period of time taken for the principal amount of the bond to be repaid” . Generally, the maturity period of short term bonds is two years or less; medium-term bonds take between two and ten years to mature, and the long term bonds take over ten years to mature.
The interest rate risk is determined by the length of time a bond takes to mature and generally if the period of maturity is long, then the interest rate risk is high. This implies that the holder will require higher returns because of the greater interest risk.
Bhat, S., 2009. Security Analysis & Portfolio Management. Excel Books India.
Institute, I.C., 2010. Investment Company Institute. [Online] Available at: http://www.ici.org/faqs/faq/faqs_bond_funds [Accessed 6th June 2013].
Krishnamurti, C., 2009. Investment Management: A Modern Guide to Security Analysis and Stock Selection. Springer.
Nikolai, L.A., 2008. Handbook Of Debt Securities And Interest Rate Derivatives. pp.34 - 42.
Ninomiya, K., 2010. eHow. [Online] Available at: http://www.ehow.com/about_4775561_advantages-disadvantages-bonds.html [Accessed 6th June 2013].
Sheffrin, S.M., 2011. Financial Accounting: Accounting for Investment Securities. Wisley & Sons. p.147.
Stein, P., 2009. Finacial Modelling:Dim Sum Bonds' on the Menu for Foreign Investors. Cengage Learning.
Strumeyer, G., 2011. Investing in Fixed Income Securities: Understanding the Bond Market. Wiley & Sons. pp.50 - 143.
Subramani, R.V., 2011. Accounting for Investments, Fixed Income Securities and Interest Rate Derivatives: A Practitioner's Handbook. John Wiley & Sons.