That's your mistake. You are assuming bond funds hold bonds to maturity. It's my understanding that they rarely hold bonds to maturity. The main exception would be funds that invest in very short-term bonds.Yes, "bonds" and "bond funds" are two entirely separate animals. Bond funds trade bonds in and out, just as a stock mutual fund does. They can suffer losses from that activites (or gains, obviously) but they rarely hold a bond to term.Holding the actual bond means you get the interest payment, and your original investment back at the end of the term (assuming the issuer hasn't gone upside down, obviously.)My wife has an IRA with CBS, which has a proprietary "bond fund" which (they say) only buys bonds and holds them to term. Therefore they are not a "bond fund" in the usual sense, but a "fund of bonds." They still have some very high paying bonds bought years and years ago, which allows them to have a much better rate than most bond funds now offer.That said, I have asked the question and never gotten a good response: if they were suddenly faced with massive redemptions, and HAD to sell bonds to comply, is there any guarantee that there would be enough money to cover? (Obviously if they were selling into a terrible bond market, my surmise is "no", but nobody there seems to want to say that.) That said, they've had this "fund" for decades and it's been OK, so we roll along with it.
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