Hi there! If you’re reading this article, then that must be because you want to learn of Bond market. The bond market investment is usually considered to be one of the safer investments that you can make. In reality this may or may not be true. Some bonds are very safe while others come with enormous risk. If you are going to get into the bond market it is important that you know how to determine the risk that applies to each bond. Otherwise you could be exposing yourself to far more financial risk than you realize.
The bond market is not surprisingly where bonds get traded. That of course raises the question of what is a bond. A bond is issued when an organization, often the government, needs to raise money. A bond is basically a loan that is provided by many people. Rather than getting a loan from one source like a bank a bond allows them to borrow money from a lot of different people.
This allows them to borrow more money than they would be able to if they were trying to borrow from a bank. Since it also spreads the risk out a bond also usually allows them to borrow money at a lower interest rate. From the standpoint of the investor a bond can be a great investment since it is usually fairly safe but pays a higher interest rate than a savings account.
Bonds are often viewed as a safe investment because you are lending money you should get it back, unlike with stocks were if the company fails you will lose everything. The reality is that not all bonds are all that safe. It largely depends on who issued the bond. A bond issued by the federal government will be very safe, a bond issued by a private company that is on the verge of bankruptcy won’t be safe at all. Generally how risky the bond is will be reflected in the interest rate.
The more risk the higher the rate. Another risk that many people don’t consider is interest rate risk. If interest rates rise before the bond matures you will actually be losing money since it could have been invested at a higher interest rate. The value of the bond will also decline if the interest rates rise which will be an issue if you want to sell it before maturity.
One of the disadvantages of bonds is that they tend to have long terms. You can get bonds that range from six months to more than ten years to maturity. This can be an issue since it is difficult to get your money out before the bond matures. The bond market helps to relieve this problem since it allows you to sell bonds before they mature.
Pricing bonds in the bond market is very complicated since it factors in the interest rate on the bond, current interest rates and time to maturity. If you want to get into actively trading bonds you are going to have to learn how all of this works.