He explains how expenses reduce the yield on a bond fund, among other important considerations. There are two ways Fred would have to pay capital gains taxes. First, like Betty, Fred will have a gain if he sells his investment for more than he paid. Secondly, if the fund manager sells a bond for more than it's worth, that capital gain will get passed on to Fred and his fellow shareholders. This happens every year to mutual fund investors.
Managers buy and sell securities all year long, incurring capital gains and losses along the way.
Knowing the investment Betty knows what she bought. She knows which company issued the bonds, and its credit rating. As for Fred, he knows that he invested in an intermediate-term corporate bond fund, but he doesn't know which companies issued those bonds, or their credit ratings. That means that, in the course of a year, the fund manager has sold all the bonds that were in the fund at the start of the year, and has disposed of half of the second batch of bonds, too. Plus, the fund is never fully invested, because a portion of the fund must be kept in cash to meet administrative needs and redemptions.