What are Closed End Bond Funds?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 29 January 2020
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Closed end bond funds are a form of investment group or company that purchases and sells options in a manner that is in accordance with the expressed goals and objectives of the fund. A fund manager has full authority to handle all purchases and sales involving the investment portfolio. He or she may sell securities in order to generate resources that are used to purchase other securities, determine how long to hold onto any given investment, and how to diversify the options. Many closed end funds are multifaceted, in that they not only trade in bonds but also stocks.

As with any type of investment strategy, closed end bond funds operate with an understanding that there is a degree of risk involved. At any given point in time, changes in the market place can cause investors to go with other investment options and steer clear of closed end bonds. When closed-in stocks are also handled by the same fund, the opportunity for market volatility to drive the value of the fund up or down increases, based on the holdings that are found in the portfolio.


Unlike some other investment approaches, closed end bond funds do not have to be concerned with investors demanding cash. This makes it possible for the fund manager to explore investments that may be somewhat less liquid, such as considering bonds that originate in nations without a fully developed bond market. As long as the investment activity remains within the limits of the fund’s bylaws and terms of operation, and the fund manager thinks the potential return is worth the risk, just about any type of bond issue can be considered.

A number of taxable closed end bond funds are currently in operation. The government bonds issued by the United States are one example. Proceeds collected from the sale of the bonds allows the fund manager, in this case the US government, to invest in other bonds and securities in order to eventually pay the bond holder the face value of the bond plus interest upon maturity. Investment-grade corporate bonds are also utilized with closed end bond funds, focusing on investing in the debt securities of corporations that exhibit considerable potential to honor the debt within terms. Convertible bonds, mortgage backed bonds, and loan participation bonds may also be included.

Municipal closed end bond funds offer another investment option. National bonds often provide a high rate of return after taxes. State municipal bonds are often an excellent option when the bond fund focuses on bonds issued within a given state. In both cases, the goal is to generate the highest level of income as possible.



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