Tuesday, October 7, 2008


Bank lends your money to others to earn an income and in return promise you a lower fix interest rate.  This promise is usually govern by authority to make sure bank fullfills that promise.  Else someone else may take over to continue pay you the promised return.

When a company does the same, its call bond.  When a company needs to raise some money, they issue bonds to you.  You buy their bond and they promise you a fix return.  Bond is also govern by similar authority as the Fix Deposit in banks.  However, if a company fails to fullfill their promised return to you, there may or may not be anyone step in to continue paying you the promised return.  Sometimes glitch may happens in bond too.  ie. a global event like huge disaster affected the whole finance world and globally the bond pay out rate is revised downward.  For that short few months, those bond funds due in maturity may be affected - paid out in lower rate than promised and there is nothing much you can do to pursue your right.

Bond Fund to Bond is just like Mutual Fund to Stocks.  So a Fund Manager helps you to select all the Good bonds so that your bond return is almost as good as Fix Deposit, but with higher return.

A large sum of Fix Deposit is actually correlated to bonds, that's why in stable market, bond fund return is usually a little bit higher than Fix Deposit interest rate.