Sometimes, institutions, governments, or private companies issue some of their small part of companies called debt to increase their capital or to fund their operations. These are called bonds, and the whole process of lending and purchasing or borrowing is called the bond market.
The bond market is also known as the debt market and credit market. It occupies a big part of the credit market, with most banks using it to increase their business. For instance, in the United States, the bond market is so popular that this country claims more than 40% of the worldwide bond market. Every field of finance has a part in the bond market.
In this article, we will discuss the bond market and the top 7 things to know about the bond market.
What Are Bonds?
Briefly, we understand that bonds are investment instruments like money, shares, or mutual funds. An investor puts some money in a company for a specific period to earn interest. The one thing that makes it different here is fixed income over some time. Bonds have a maturity date when the investor gets his investment back.
In other scenarios, a company sells its bonds to accumulate money to finance the company and increase its business, sometimes for the acquisition of other companies also. Similarly, governments sell bonds for revenue and to fund their projects. Therefore, the bond market offers more flexibility, safety, and return than the share market. Visit https://www.bondexchange.com.au/ to compare various options and invest in the bond market.
What Are the Different Types of Bonds?
It is challenging to categorize bonds. But, in a broader aspect, there are four types of bonds. As we know, income attracts taxes, so investors must consider the taxes on various bonds before investing their hard-earned money.
Corporate bonds
The bonds issued by any private or public company to fulfill fund requirements like payments, research, acquisitions, etc., are known as corporate bonds. State income taxes are levied on it.
Government bonds
These bonds are issued by the government and are also known as treasuries. They are also subject to tax; however, most cases do not attract taxes.
Agency Bonds
Government Sponsored agencies give away bonds to raise funds for education and agricultural lending programs. These bonds are subject to income tax with some exceptions.
Municipal bonds
Local state bodies issue bonds to investors to fulfill the local requirements of the city or state. For instance, projects like educational institutions, hospitals, parks, bridges, and other infrastructures for the development of society are developed with the revenue of these bonds. Investors can seek tax-free income with these bonds. And other public facilities.
Various features of a bond
Zero-Coupon Bonds
Zero-Coupon bonds do not pay any interest to the investors. Instead, investors get these bonds at a lower price than their value. Further, on maturity, they get the bond’s full face value.
Callable and puttable Bonds
These bonds come with an option to call or put. It facilitates the buyer to sell or pay off the bonds before maturity. If an investor finds that the bond is paying a good profit before maturity, the investor can settle it down before maturity to pay his debts. These provisions have a preset agreement for execution.
Convertible Bonds
These corporate bonds offer flexibility to convert these bonds into other instruments. Before maturity, if an investor finds that he can make a better profit in less period, the bonds can be converted into shares. These bonds are also called equity kickers.
Bond Ratings and their utility?
What if you purchase a bond and the company becomes bankrupt? Here the bond rating work helps the investor. Bond ratings are derived from the overall performance and credibility of the company. It shows the risk involved, past performance, and future aspects of the corporation. With these features, one can ascertain the investment risk and make a good investment.
The power of the bond market.
The bond market is increasing exponentially. Its popularity and demand are the same in every corner of the world. As a result, companies and individual investors are earning fortunes from the bond market. According to a reputed industry group, the daily trading in the bond market has exceeded $750 billion in comparison to the stock market, which has merely touched the level of $250 billion.
The risk involved in the bond market
Wherever there is an investment, there is a risk of loss. Look at companies like KFC, which made their debut after decades. The owner created his business after the age of 60. Every investment either takes time to grow or fails to perform. Now it’s the discretion of the investor to invest.
A rise in the stock market can affect the bond market; also, more people shall tend to invest in the stock market rather than the bond market. Any new decision of the government can mobilize the rates of the bond market. Any financial incident in the market can make bonds volatile.
Some basics of Bond
Some Basic things about bonds are mentioned below:
- Bonds mature over some time and can give good returns.
- There are three types of bonds according to the period of investment
- Short-term – This matures under 3 years.
- Medium-term – Bonds that mature in ten years
- Long-term – These bonds mature over a long period of up to 40 years.
- Bonds give a good return, i.e., interest.
- Bonds are either secured or unsecured. The secured bond guarantees the investor receives a good return, but the prices of these bonds are relatively higher than other bonds. The unsecured bonds come with a lower price but do not guarantee a good return to investors. The collateral damage has to be borne by investors only.
- In an incident of bankruptcy of an institution, the order of settlement of debts depends upon the investor’s share; firstly, the senior debts are settled, then the junior, and then the shareholders.
Bottom Line
Bonds are considered safe and profitable investments. The profit may be high or sometimes low, but the chances of loss are rare. Even in the case of a default, the investor gets paid off and rarely gets into a loss. Perhaps venturing into the bond market looks lucrative, but complete research is imperative for good returns.
