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What are the Different Types of Corporate Bond Funds?

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  • Written By: K. Kinsella
  • Edited By: A. Joseph
  • Last Modified Date: 27 September 2016
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Corporate bond funds are mutual funds that contain a variety of debt instruments or bonds. Mutual funds companies create bond funds that focus on a particular type of debt, and most corporate bond funds primarily contain domestic, global, international or junk bonds. Different types of corporate bond funds have varying levels of risk and potential rewards. Generally, bond funds are a more conservative investment vehicle than stock funds, because in the event of a corporate bankruptcy, bondholders have to be paid first before stockholders can make any claims on the failed company's assets.

Domestic corporate bond funds primarily contain investment-grade debt issued by companies that are based in the nation where the fund is registered. Bond rating agencies define investment-grade debt as bonds rated at or above a certain grade, such as "BBB." Bond ratings reflect the financial strength of the company that issues the bond. Companies that issue bonds with high credit ratings are less likely to default on bonds than companies issuing low-rated bonds. Many domestic corporate bond funds pay out dividends, which are comprised of interest payments that the mutual fund company receives from the bond issuers.

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Junk corporate bond funds contain bonds that are below investment grade. Low-rated bonds usually can be bought at below face value because of the high risk of issuer default. People who buy junk bonds do so with the hope that the bond issuer will honor the debt. Companies that have low credit ratings pay high interest rates on debt in order to attract investors. Bondholders can make significant profits if the issuers maintain the regular interest payments and if the bondholders can redeem the bonds for face value at maturity.

Many people buy global corporate bond funds because the funds contain both domestic and foreign bonds. Diversity reduces the level of risk to which investors are exposed, because global bond funds are not reliant upon the continued financial strength of companies in any one particular country or region. There are global funds available that contain primarily junk bonds as well as investment-grade bonds.

Some investors prefer international bond funds to global bond funds, with the difference being that international funds contain only foreign bonds. Companies based in the developing world generally have lower credit ratings than established firms in developed nations, and therefore, bonds from these firms tend to pay higher interest rates. International bond funds often contain bonds from one part of the world, which enables investors to concentrate their assets in bonds from areas of the world that are experiencing economic growth.

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