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Municipal bond funds invest in municipal debt securities.
State and local governments issue them. Their income dividends are
usually free from federal taxes, although capital gains from distributions
or sales are taxable. Municipal bonds may be short-term,
intermediate-term or long-term.
U.S. Government bond funds invest in debt securities of
the U.S. Government and its agencies to produce current income with
preservation of principal. The federal government is thought to be
a good risk and can pay interest and repay principal quite
effectively. These funds include Treasury bills, Treasury notes,
Treasury bonds and mortgage-backed securities.
Corporate bond funds are made of bonds issued by
companies in the private sector. They are considered less risky
than stock funds because of the "corporate guarantee to pay
interest and principal." However, a guarantee is only as good
as the financial strength of the guarantor.
Zero coupon bond funds are pools of zero coupon bonds. A
zero coupon bond is a bond that is sold to an investor at a
discount. It does not pay interest. When it matures, the
investor receives the face value of the bond. The difference
between the face value and the discounted purchase prices is
treated as interest. While current income is not the
objective of a zero coupon bond fund, the fund can and may pay
dividends if it has any realized income from the sale of bonds in
the portfolio. When buying shares, the investor pays whatever the
current market value of the fund is. The investor can always redeem
his or her shares for cash.
International bond funds invest in debt securities of
governments and corporations of other nations. They are attractive
to some investors because higher rates may be paid in other
countries. However, changes in currency conversion rates can alter
the earnings values of these bonds.
Convertible securities funds invest in debt securities
that can be converted into stock. These funds
have the objective of current income and growth with preservation
of principal. Thus, they offer characteristics of stocks and bonds.
Additionally, while in down times stocks can fall to very low
prices, convertibles can still earn the income of bonds. | 
