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INVESTING ESSENTIALS
08/29/2023
08/29/2023
Corporate entities use money raised with bonds to fund ongoing operations (e.g., technology upgrades or business expansion). The federal government, states and cities issue bonds in order to raise money for a variety of reasons. Governmental agencies use money raised with bonds to fund projects that benefit the community (e.g., to build roads or improve a local school).
When a bond is available for purchase, these are some of the key things investors look for:
On the other end of the risk spectrum are bonds issued by corporations with a low credit rating, and are referred to as “high yield” or “junk” bonds. While they can offer a higher coupon rate, they also carry higher risk. Corporations may have a lower credit rating for several reasons including a spotty financial record, small size, risky business model, or a high amount of debt.
A common type of bond is a U.S. Treasury note (T-note). As an example, a T-note might have a face value of $10,000, a maturity of five years, and a coupon rate of 2%. If you own this bond, you’ll receive $200 a year for five years. When this T-note matures, you’ll receive the face value of $10,000. The bond’s yield stays at a steady 2%. Seems pretty straightforward, but here’s where bonds get complex.
Bonds can be bought and sold during the span of their maturity. The face value of a bond doesn’t necessarily reflect its market value. Major players in the bond market, like the U.S. Treasury, are issuing new bonds as older ones mature. These new bonds reflect the interest rate when they’re issued. For example, a new $10,000 T-note bond may have a coupon rate of 8% instead of bonds issued, let’s say, a year ago at 6%. This can mean that interest rates were lower a year ago. A $10,000 T-note with a 6% coupon rate has less value to investors than one with an 8% coupon rate, and its market price may drop from $10,000 to $9,000. In turn, its bond yield increased from 6% to 6.6%. So, when interest rates go up, bond prices go down, which in turn cause yields to go up. This price movement is what makes the bond market so dynamic.
Bond mutual funds can be comprised largely of one type of bond (e.g., municipal bonds) or a combination of bond types (e.g., corporate and government bonds). Bond funds may have varying ratings, sectors exposure, and maturities. This diversification of bonds can help mitigate, but not eliminate, the volatility of the mutual fund.
Generally, bonds are considered less risky than stocks. This is because most bonds aim to pay interest and return the principal investment. Due to the complexity of bonds, and that bonds are typically purchased in large lots, most investors of bonds are institutional.
Thrivent Mutual Funds offers a wide variety of bond mutual fund options. Some are focused on generating high levels of income and invest in higher risk bonds as a way to try to achieve this. Some funds are focused on adding diversification to help mitigate risk of an overall investment portfolio.
When you choose to invest with Thrivent Mutual Funds, you’ll benefit from the expertise of our investment professionals and the convenience and choices we provide to make investing easier. So go ahead and explore the options.
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