What Are Intermediate Bond Funds?

••• Image by Flickr.com, courtesy of Duncan Rawlinson

An intermediate bond fund invests primarily in intermediate-term bonds. Intermediate-term bonds are bonds that come due for payment (mature) in usually two to 10 years from the date they were issued.

What is a bond

A bond is basically an IOU. It is an agreement that the bond issuer will pay the bond purchaser interest on the amount of the bond and the face value of the bond when it matures.

Investment Strategy

Bond funds invest primarily in bonds or other types of debt securities.

Types of Bond Funds

Types of bond funds include government bonds, municipal bonds, corporate bonds, convertible bonds, zero-coupon bonds and international bond funds. Government bonds funds contain securities that are backed by the U.S. government, and are therefore considered the safest of the bond funds.

Significance

Usually the interest rate on intermediate-term bonds is greater than the interest rate on short-term bonds of similar quality

Considerations

Intermediate-term bonds work well in a portfolio that consists of several bonds that have different maturity dates.

Risks

Risks associated with bond funds are credit and interest rate risks. A credit risk is when the issuer may default on the payments and an interest rate risk is that the interest rate will rise when the bond comes due, causing the market value of the bond to decline.

References

Photo Credits

  • Image by Flickr.com, courtesy of Duncan Rawlinson