Based on this chapter of Portfolio Management of Bond Funds, bond funds are also known as fixed

income funds because the issuers of bond are responsible to make specified payments to investors
on fixed dates, and the bond returns is more stable than stock returns. Therefore, bond funds are
split into two major segments which are taxable and tax-exempt.

Taxable funds invest in a variety of bonds that pay interest subject to federal income tax. It
invested in securities issues by the U.S. Treasuries where the bonds issued and guaranteed by the
U.S. government, agencies that are obligated either by federal government agencies or government-
sponsored enterprises, mortgage-backed securities where it is a collection of a large number of
residential mortgage assembled together in a pool, asset-backed securities that are also based on
pools of debt, non-U.S. bonds which the bonds that can be invest outside the U.S., and derivatives
which is the contracts that derive its value from an underlying security or group of securities.

While tax-exempt funds invest in bonds issued by states and municipalities that are exempt
from federal and state income taxes. These funds are less diversified than the taxable market and
composed by general obligation bonds that issued by states and local government that pledge their
taxing power to repay investors, revenue bonds that issued to fund a specific project, insured bonds
that are issued by specialized companies, guarantee repayment of interest and principal as it comes
due and pre-refunded bonds which are backed by a portfolio of U.S. Treasuries.

Bond funds portfolio managers use various strategies to choose securities. They may use a
top-down strategies approach or bottom up strategies approach. Active managers look on a total
return that is higher than the benchmark index and ranks high in its peer group. Therefore, there are
some of the managers are use top-down strategies approach such as duration management that
involves altering the average duration of the fund based on the macroeconomic situation, yield curve
positioning which use to predict shifts in the shape of the yield curve, or sector selection that allows
portfolio managers to tries take advantage of performance differences among the different bond
market sectors.

While other managers prefer to use bottom up approach that focusing on credit selections
that allowed to choosing bond of certain issuers based on the outlook and on predicting calls or
prepayments that managing the level of call or prepayment risk.
Based on this chapter of Portfolio Management of Money Market Funds, money market funds have
become essential cash management mechanism for both institutions and individuals. Thus, money
market funds may report a stable $1.00 per share NAV if they follow SEC Rule of 2a-7. If the
managers meet certain test, as set out in the SEC Rule 2a-7, the managers can use amortized cost
accounting method to compute their reported NAV. The SEC Rule 2a-7 is limits their investments to
only high quality, short-term fixed income instruments and places restrictions on the maturity, credit
quality, diversification, and liquidity of money fund holdings. However, the fund must be compute by
a daily NAV using market-value NAV that known as shadow price. If the shadow NAV is higher than
$1.04, no action is required. Meanwhile, if the shadow NAV is drop below $0.995, the managers
must stop using amortized cost accounting. This situation is called as breaking the buck.

Money market funds are split into two major segments which are taxable and tax-exempt.
Taxable money market fund has three subcategories which are U.S. Treasury funds that invest in U.S.
Treasury securities, U.S. government funds that invest in federal agency securities and general-
purpose funds that hold a wide range of securities. Taxable money market funds also invest in
treasury securities which is the largest issuer of money market securities, agency securities that
obligated on federal government agencies or government-sponsored enterprises, commercial paper
that issued by corporation to finance short-term cash, certificates of deposit that make deposits in
banks, and also repurchase agreements that enable broker-dealer to finance the whole block of
securities that they hold.

Tax-exempt money market funds are more complex then taxable money market funds. Tax-
exempt money market is mainly invest in municipal notes that issued by state and local government
with a maturity of one year or less, commercial paper which are backed by a letter of credit from a
highly rated bank or insurance company, and also variable rate demand notes that known as variable
rate demand obligations that consists of a long-term tax-exempt bond and a short-term put option.

Managing money market funds need to ensure that mangers can maintain the stable $1.00
NAV and providing a competitive yield by monitoring average maturity of portfolio, allocation among
maturities, liquidity and allocation among types of securities.

Money market funds always interchangeably with saving account, but it has clear distinctions
which are immediate access to funds that provided by both markets, payment of competitive market
interest rates that provided by both market but through different tools, FDIC insurance that carried
by bank deposits, but limit to $250 000 per account, local convenience where banks have a local
presence through bricks and mortar branches, while money market do not have, and also banking
services that provided by both market such as check-writing.