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Bond Fund Investment Categories
Government bond funds invest in bonds that have been issued by the United States Treasury as well as other governments. Funds that invest in Treasury bonds are some of the safest of government bond funds. The United States Treasury has never defaulted on its debt and Treasury securities are backed by the full confidence of the government of the United States. Another form of bonds is agency bond funds which invest in agency bonds. These are backed by a government agency or government sponsored enterprise. Agency bonds include mortgage backed securities and these have a distinctive kind of risk called prepayment risk and this makes them riskier than the government bonds. Corporate bond funds are another and these invest in corporate bonds. Corporate bonds consist of investment grade or high-yield bonds. High yield bonds are some of the riskiest of bond fund categories given that they have more of a default risk. You also have tax exempt bond funds that invest in bonds whose interest is freed from federal and, sometimes from state income taxes. Tax exempt bonds are also known as municipal bonds. A municipal bond whose interest income is not liable from federal and state income tax is a double-exempt municipal bond. If interest income is also exempt from local tax, it is known as a triple exempt municipal bond. Another is zero coupon bond funds which invest in zero coupon bonds. Zeros are bonds that are sold at a considerable discount in order to balance out the value. Throughout the bond's period to where it matures, the bond price slowly but surely increases to reach balanced value when it matures. Bond investors don't in point of fact obtain interest income, but owe taxes on the amount of imputed interest income that is earned. Investors may choose to purchase zero coupon bonds for a tax-advantaged account given that the account allows them put off income taxes until they start to take money out. Another is the foreign bond funds, which invest in the bonds issued by companies that are registered outside of the United States.
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