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What is a bond?
A bond is basically an IOU issued by a corporation or government entity. When investors buy a bond, they are essentially lending the issuer money for a specified amount of time. In return, the issuer makes interest payments and returns the principal on a set date, which is known as the bond's maturity date.

What is a bond mutual fund?
A bond mutual fund is made up of many individual bonds — the type of bonds would depend on the investment objective and policies of the particular fund. Many bond mutual funds invest in a wide variety of bonds which may include bonds issued by the U.S. government, mortgage- and asset-backed securities, corporate bonds and foreign bonds. Government bonds and some mortgage-backed bonds are backed by the full faith and credit of the U.S. government, meaning they are guaranteed as to the timely payment of principal and interest. While the U.S. government guarantees the timely payment of principal and interest on these bonds, the market value and the share price of these bonds are not guaranteed. Corporate bonds carry credit ratings which help indicate the likelihood that the issue will pay interest and repay principal on a timely basis. The two main categories of corporate bonds are investment grade and below investment grade.¹ The latter are more commonly known as "junk bonds."

How do taxable bond mutual funds work?
Taxable bond mutual funds are managed by a professional money manager who, along with a team of analysts and bond specialists, research the bond market and decide on which securities to buy. A major benefit of bond mutual funds is that most pay monthly income. Individual bonds generally pay interest only twice a year, so bond funds may be helpful for individuals requiring current income on a regular basis. Most bond funds have relatively low investment minimums, allowing investors to establish a diversified portfolio of bonds. Due to the high face value of individual bonds, investors would need a much higher investment to build a diversified portfolio on their own.

Why should I consider bond funds for my portfolio?
One of the primary reasons to invest in bond funds is for current income — making them an investment solution for individuals where regular income is a priority — people at or near retirement, for example. But another important benefit that bond funds provide that is often overlooked is asset allocation. Stocks and bonds often react differently to economic and market events, and a portfolio that includes both asset classes helps to increase diversification and manage the overall volatility of the portfolio. Of course, asset allocation and diversification does not guarantee a profit or protect against loss.

The relationship of bond prices and interest rates
Like many other investments, bonds fluctuate in value. This is true for bond mutual funds as well. One major factor affecting bond prices is the movement of interest rates. Bond prices and interest rates have an inverse relationship — as one rises, the other falls. This is known as interest-rate risk.

In a hypothetical example, let's say an investor purchases a bond for $1,000 that pays 6%. Interest rates rise, and new bonds issued now pay 6.5%. If the investor looks to sell the bond, a 6% bond becomes less attractive when a higher yielding bond is available, so the 6% bond would decline in value. Now let's assume the opposite, that interest rates are lowered to 5.5%. The 6% bond becomes more valuable, since only lower yielding bonds are now being issued. The investor would now be able to sell the 6% bond for more money because buyers would be willing to pay more for a higher interest rate.

The same holds true for bond funds. The movement of interest rates would affect the prices of bonds in the fund's portfolio, which would in turn affect a fund's share price. Short-term bonds, and bonds close to maturity, generally are affected by interest-rate changes to a lesser degree than longer-term bonds.

What other risks are associated with taxable bond funds?

Interest rates, though, are not the only factor moving bond and bond fund prices.

• Credit risk. This relates to any privately issued bond. Credit quality refers to a company's ability to make principal and interest payments in a timely manner. Independent rating agencies such as Standard & Poor's and Moody's Investors Service have their own ratings systems, but generally the higher the rating assigned, the lower the likelihood that the issuer will fail to meet these obligations. Credit quality ranges from the highest quality investment grade (AAA) to below investment grade (BB and lower). Lower-grade bonds usually pay a higher yield in order to compensate investors for the increased credit risk.
  
  
• Prepayment risk. Prepayment risk generally applies to mortgage-backed and many asset-backed bonds. Many kinds of mortgage securities, for example, may be paid early (i.e., prior to the bond's maturity date) when homeowners decide to refinance their mortgages when interest rates decline. Prepayment causes bond funds to reinvest proceeds at lower prevailing rates, potentially reducing performance.
  
  
• Liquidity risk. When there is little or no active trading market for a bond, it can be more difficult to buy or sell the security at or near its fair value. In such a market, the value of such securities, and a bond fund's share price, may decline dramatically.

How can I add taxable bonds to my portfolio?
Do you have the time, resources or the inclination to actively manage a portfolio of taxable bonds? Even experienced investors may find identifying the right investment opportunities at the right time a challenge. By investing in a Dreyfus taxable bond fund, you're able to tap into the investment expertise and resources of a professional management team.

A Dreyfus mutual fund's professional management team consists of portfolio managers, economists, analysts and traders who perform their own research, conduct in-depth analysis and use a range of sophisticated techniques in making investment decisions. Their experience, knowledge and resources are critical to optimizing performance potential and managing risk.

Dreyfus offers a range of taxable bond funds with varying maturities and risk profiles to help meet a variety of financial needs:

• Treasury and government bond
• Mortgage-backed bond
• Corporate bond
• High yield bond
• Core bond
• Ultra-Short bond

¹Bond ratings reflect the rating entity's evaluation of the issuer's ability to pay interest and repay principal on the bond on a timely basis. Bonds rated BBB/Baa or higher are considered investment grade, while bonds rated BB/Ba or lower are considered speculative as to the timely payment of interest and principal.

Questions? Contact us.

Investors should consider the investment objectives, risks, charges, and expenses of a fund carefully before investing. Download a prospectus that contains this and other information about a fund, and read it carefully before investing.

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