Chapters

Chapters

Lesson 05 / 05

In this lesson

The claims you own
Payment schedule and purchase cost
The ongoing allocation
Defined maturity and retirement dates
Maintenance and the household goal

Individual bonds and bond funds

Compare the payment claim, ongoing exposure and maintenance you would actually own, rather than treating a maturity label as a promise to recover purchase cost.

What do you own a right to?

Follow the issuer's maturity payment. Columns show common phases, not shared calendar dates.

Individual bond

You ownIssuer's payment claim
Cash received by youCoupons + final principal
After final paymentClaim ends, if fully settled

Ongoing bond fund

You ownUnits; fund owns bonds
Cash received by fundMaturing bonds → replacements
Fund continuesYou retain units at current value

Defined-maturity fund

You ownUnits; fund owns bonds
Cash received by fundMaturing bonds → cash holdings
Closure cash paid to youRemaining NAV after liabilities

Payments depend on issuer and product terms. Funds may distribute income while you hold them; reinvestment and cash handling follow their mandates. Neither fund route promises repayment of your unit purchase cost.

Compare currency, credit, duration, access and full costs. A short government bond versus a long corporate fund changes underlying risk as well as wrapper.

Compare diversification, administration and early-sale terms

Direct holdings and funds can be concentrated or share risks. You or an engaged manager administers direct bonds; fund management costs pass through to investors.

Direct sales depend on available price, liquidity and transaction costs. Fund sales depend on dealing terms/unit value/costs, including ETF spreads.

Principal repayment can be below purchase cost.

Invented non-callable bond: €1,000 face value, annual €40 coupons, two years remaining. Buy just after a coupon. No accrued interest, fees or taxes; annual discount-rate convention.

TodayYou → seller€1,050 paid
Year 1Issuer → you€40 coupon
Year 2 · maturityIssuer → you€1,000 principal
+ €40 coupon€1,040 total

Equal one-year intervals; box sizes do not represent euros. Future payments are promised, not guaranteed.

If all payments arrive, €1,080 receipts − €1,050 cost = €30 nominal gain before reinvestment, fees and tax. The principal alone is €50 below cost. Match dates, currency and amounts to the goal, allowing for credit and an earlier need.

Reconcile the premium and a maturity ladder’s extra work

The €30 gain is not annualised: the two receipts arrive on different dates.

Bond coupons may also arrive before or after bills. A ladder adds records, cash-awaiting-use and reinvestment decisions; corporate holdings require enough separate borrowers to avoid one-company dependence.

An ongoing fund maintains exposure.

Replacement bonds can maintain duration; income, losses and expenses pass through. Portfolio YTM and distribution yield guarantee no holding-period return. Assess the absence of an end date against the goal.

Compare current values on both sides

A statement showing original cost hides any loss in current sale value. Compare today’s bond price with today’s unit value; future principal is a different measurement. Rights and dates still differ.

A closing year does not specify a fixed payout.

The closing route above follows the cited iShares structure; other products require checking their own terms. It is a structural example, not a provider recommendation.

Defaults, expenses, price paid and income during transition affect results. Check actual closure/payment dates, not just the named year. A target-date retirement fund instead changes allocation towards or through retirement: its date alone implies neither closure nor repayment.

Read the final distribution term

Final net asset value after liabilities is the remaining value, not each investor’s purchase cost.

Include the work after buying.

Direct holdings need issuer-change, maturity, proceeds and record checks. Funds still need mandate, charge and account reviews and a replacement plan for a terminating fund.

Choose required payments or continuing exposure, accepted risks and unresolved checks. Different goals can use different routes. Extra holdings must justify their work; core knowledge can suffice.

Check your understanding

Try each question, then check your answer.

Choose questions from another chapter

Maturities inside an ongoing fund

An ongoing bond fund owns bonds that mature over time. What does that establish for someone who buys its units?

The fund’s average maturity specifies when the investor can plan to recover the unit purchase cost.
Portfolio YTM specifies the investor’s realised return once underlying maturities have paid.
Underlying payments belong to the fund; the investor has no matching promise to recover purchase cost on one bond's maturity date.

Show the explanation

Correct answer: Underlying payments belong to the fund; the investor has no matching promise to recover purchase cost on one bond's maturity date.

The investor owns units, not a promise to recover their cost at the portfolio’s average maturity. The fund can reinvest maturing proceeds under its mandate; unit value reflects the portfolio after liabilities. Portfolio YTM does not settle the investor’s realised return.

Return to the explanation

A planned fund closing year

A target-maturity bond fund plans to close in a specified year. What should its end date be understood to mean?

A planned wind-down under its terms, with the eventual payout dependent on holdings, payments and expenses.
A buy-and-hold investor can budget the original unit cost as final repayment despite interim price changes.
The year when the fund reaches its retirement allocation and then continues running with that mix.