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I freely admit I don't know that much about bonds, but every time I look into it, I conclude I don't need to look into it.

One key advantage that individual bonds have over bond funds is that bonds mature, while most typical bond funds do not. In periods of rising rates, absent a default, you will still get exactly the face value of an individual bond at maturity, while a bond fund is more likely to be down in value due to the rising rates and longer duration.

Another key advantage comes if you go past plain vanilla bonds. I had a professor in grad school that used to make his money trading ‘busted convertible bonds.’ Those are bonds where the company got a lower interest rate than it otherwise would have by offering the option to turn its bonds into a certain number of shares of stock at some point in the future. If the stock is down substantially, the bonds often trade based at a substantial discount due to the market no longer valuing the conversion option. The professor would dig through the financials and as long as he felt the bond would be paid at maturity and the total return to maturity was high enough, he’d buy and wait. He’d get the higher rate from buying the busted convertible and would occasionally have one whose stock would recover.

I’ll fully admit that takes more time and effort than I’ve been able to put towards bond investing, but I guess if it were part of my job, I’d figure it out.

Regards,
-Chuck
Discovery/HR Home Fool
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