In part 2, we are going to look into the bond investment from an opposite perspective - Maximizing returns, capital growth and interest income.
This situation arises when buying a bond when the price is low, and selling it when the price has risen. Under this circumstance, the bond maturity is no longer a concern. Bond prices fall when interest rates are rising and vice versa. The capital gains from bond sales are added to interest income to boost the overall return on the bond.
For instance, a ten-year, 5% coupon bond purchased at a price of $100 and sold at a price of $105 a year later would produce a total return of 10% for the year. That is the 5% of the capital gain and 5% of the annual interest income.
The benefit of buying bond funds is to have the opportunity to benefit from bond market movements while leaving the day-to-day investment decisions to professional portfolio managers. In the end, we, as the investors, are able to enjoy the capital gain as well as the interest income.
An investor can consider investing in a bond mutual fund to achieve the diversification of their bond investments for the following benefits:
- the cost to invest in bonds is less than it would cost to construct a portfolio of individual bonds.
- leaving the day-to-day operation worries and decisions to the fund manager.