A bond fund can go up or down depending on interest rates...
Do people here actually invest a good amount in bond funds like Vanguard's BND ETFF?

I hold individual preferred stocks, not anything like a preferred stock fund, but bonds would work the same way, the way I would use them. If I could get hold of a bond database so I could search it without having to put up with a broker's pitching me and doing searches for me, I'd hold individual bonds.

The bond itself will not vary in payout once it's been sold. A $100 bond with a 6% coupon will pay $6 per year, year in and year out, independently of interest rates in the market and regardless of the bond's current market price.

Since I don't have access to any bond databases, but I do have access to a preferred stock database (QuantumOnline.com, quantumonline.com: QuantumOnline.com - Preferred Stocks, Common Stocks, Exchange Trade Securities (ETFs) and Convertible Securities Information ) I use preferreds. I hold the preferreds until they're called, and I'd hold the bonds until they mature, not caring about underlying interest rates or market prices (other than with preferreds, the entry price). That way I get a steady income without the vagaries of the market. As you said, those vagaries are what common stocks are for; those vagaries are where the positive gains can occur, at commensurate risk of loss, and that's where I put my at-risk money.

Eric Hines