What Is a Corporate Bond Fund?
Corporate bond funds are one of three major types of funds along with government bond funds and municipal bond funds. Corporate bond funds are more sensitive to economic cycles and offer investors higher dividend yields than the other bond fund types. Investors looking for high current income should consider corporate bond funds. Fund structure may be a mutual fund or closed-end fund.
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Corporate Bonds
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Corporate bonds are debt securities issued by companies. Issuing bonds is a way for public and private corporations to borrow money. A typical corporate bond has a maturity date when the principal is repaid, and pays a fixed rate of interest in semi-annual interest payments until maturity. Corporate bonds are marketable securities that can be bought and sold on the secondary credit markets. If a corporation declares bankruptcy, bondholders have a higher claim on the company assets than common stock shareholders.
Credit Quality
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A major evaluation factor in evaluating corporate bonds and bond funds is the credit rating of the bonds. Bond issuers are rated by agencies, such as Moody's and Standard & Poor's, with a letter grade indicating the ability of the company to meet its financial obligations. Investment grade bonds have ratings of BBB or higher, for example A and AA. Bonds rated below BBB, such as BB or CCC, are termed non-investment grade. Most corporate bond funds hold either investment grade or non-investment grade bonds. Non-investment grade funds are often referred to as high yield funds.
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Bond Fund Advantages
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Corporate bond funds give investors the advantage of investing in a professionally selected portfolio of bonds. A diversified portfolio of corporate bonds in a fund provides a higher level of safety than owning just a few individual securities. Bond funds can be purchased with a relatively small initial investment and additions can be made to the initial investment amount. Corporate bond funds pay out the interest earned as monthly dividends. The dividends from a mutual fund can be taken as cash or reinvested into more shares of the fund.
Investment Grade Vs. High Yield
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Investment grade corporate bonds are debt securities with a high level of safety and yields typically above government bonds. Investors looking for an incremental yield boost over a government bond fund will find the higher yield in funds with an average credit rating in the AA to A range. High yield bond funds are more speculative and provide investors with a significantly higher dividend yield and possibilities of capital gains. High yield bonds perform well in a growing economy and are more subject to default in recessionary times.
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