One difference between bonds and bond funds is:

• A. Bonds are always less risky than bond funds.
• B. Bonds have a fixed maturity date, while bond funds do not have a set maturity date.
• C. Bond funds pay interest directly to investors, while individual bonds do not pay interest.
• D. Bond funds guarantee the return of principal at maturity, while individual bonds do not.

Answer: (B)

Verified step by step guidance

1. Understand the key characteristics of bonds: Bonds are debt instruments issued by entities like corporations or governments. They have a fixed maturity date, meaning the principal amount is repaid to the bondholder at the end of the term. Bonds also pay periodic interest, known as coupon payments, to the bondholder.
2. Understand the key characteristics of bond funds: Bond funds are investment vehicles that pool money from multiple investors to purchase a diversified portfolio of bonds. Unlike individual bonds, bond funds do not have a fixed maturity date, as the fund manager continuously buys and sells bonds within the portfolio.
3. Compare the maturity aspect: Bonds have a fixed maturity date, which provides certainty about when the principal will be repaid. Bond funds, on the other hand, do not have a set maturity date, as they are designed to be ongoing investments.
4. Analyze interest payments: Both bonds and bond funds pay interest, but the mechanism differs. Bonds pay interest directly to the bondholder through coupon payments. Bond funds distribute interest income to investors based on the fund's earnings from the bonds it holds.
5. Clarify misconceptions: Bond funds do not guarantee the return of principal at maturity, as they do not have a fixed maturity date. Individual bonds, however, do guarantee the return of principal at maturity, provided the issuer does not default.