What is the difference between a bond and a bond fund? I was asked this question yesterday and it is important investors know the difference between the two prior to building their own portfolios. A bond is a loan a company/government or entity engages in with the public or third party in return for a pre-determined rate of interest throughout the loan duration. Hence, were I to borrow €100 from my friend Jerry today for five years, I would pay Jerry an amount of interest on his €100 loan per year or semi-annually as compensation for the risk he undertakes in lending me the money. Once the five years are up, I would then be due to return Jerry's €100 original loan along with his final interest payment on the loan. It seems simple in context, but bonds are far more complex than they seem. Prices tend to fluctuate throughout the duration of a bond and repayment of a bond's principal depends on a number of factors, notably a company's cash flow condition (or country's balance of payments), bond seniority in the capital structure, industry and macroeconomic environmental conditions and the basic economic concepts of demand and supply. A term popularly used in Malta is the phrase...
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