The bond market (or debt market) is a place where companies and governments trade debt securities to raise capital. Often called fixed-income markets or credit markets, these markets include the U.S. Treasury bond market and corporate bonds. Unlike stocks, bonds are contracts that must be paid back at a specific date. Organizations like Standard rate them, Poor's and Moody's Investor Service, so you know what level of risk you're taking with your investment.
Government bonds are a type of debt governments issue to finance government spending. They are printed with a promise to pay periodic interest and coupon payments and repay the original face value at the bond's maturity date.
The price of a bond depends on several factors, including the issuer's credit rating and market conditions. It also depends on the size of the issuer's budget and the government's ability to pay back the bondholders if it defaults.
Inflation risk is another factor that can impact the price of a bond. Many governments issue inflation-indexed bonds, linking interest and maturity payments to a consumer price index.
These bonds generally pay a higher yield than other bonds with comparable maturities because they have more sensitivity to interest rate changes. The market uses a measure called duration to estimate how sensitive a particular bond is to interest rate movements.
Government bonds are a popular investment choice for individuals, institutional investors, and firms. They are considered one of the safest types of fixed-income securities. However, they can be volatile. Investors can mitigate some of this risk by choosing a variety of different bonds and by diversifying their investments. They can also use bond exchange-traded funds (ETFs) to gain exposure to specific classes of bonds without owning them directly.
Corporate bonds are debt obligations that corporations issue to raise capital for business expansion or general corporate purposes. They are a quicker, easier way to raise funds than issuing shares of stock, and investors can usually expect a fixed rate of return for their investment if they hold the bonds until maturity.
The terms of these bonds can be long-term or short-term, and they can also be convertible or callable. Convertible bonds allow investors to convert their holdings into company shares at some point in the future.
Investors should choose a bond based on its credit rating, influenced by a rating agency such as Standard Poor's, Moody's, or Fitch. Those with high ratings pay low-interest rates and are less likely to default than those with lower ratings.
Because a corporation issues these bonds, they carry credit risk, which is the potential for the issuer to fail to meet payments and repay the principal. This risk is typically compensated for by a higher yield, or credit spread, than government bonds with similar maturities.
The three major credit rating agencies--Standard Poor's, Moody's, and Fitch--rate bonds on their issuer's financial strength, including its balance sheet, profit outlook, competition, collateral, and the macroeconomic outlook. The three agencies also consider event risk, which includes a variety of factors that could impact the ability of an issuer to make timely payments to bondholders.
Agency bonds are debt obligations issued by agencies or government-sponsored enterprises (GSEs). They are perceived to carry lower credit risks than Treasury securities and offer slightly higher yields.
Agencies issue bonds to finance various projects, from agriculture to public development. Investors purchase these bonds with the expectation that they will be paid interest and principal back at maturity.
Bonds are issued in various tenors, including short-term and medium-term. The price of these bonds can fluctuate widely due to changes in interest rates.
Some agency bonds are callable, allowing the issuer to redeem them before maturity at a predetermined price, known as the call price. This feature can provide an additional yield to investors who hold these investments in a rising rate environment.
However, not all agency bonds are considered liquid, and some have structures that make them more complex and challenging to buy and sell for individual investors. The minimum investment requirements for these bonds can also be high, making them less suitable to many investors than U.S. Treasuries or agency bond funds. Taxes may apply to certain agency bonds, though not all. Additionally, depending on the issuer, agency bonds may be subject to local and state taxes. Be sure to research these issues thoroughly before investing in them.
Comments