What Is the Bond Market?

• The bond market—often called the debt market, fixed-income

market, or credit market—is the collective name given to all trades and
issues of debt securities. The bond market broadly describes a
marketplace where investors buy debt securities that are brought to the
market by either governmental entities or corporations.

What is a Bond ?
A bond is a loan that the bond purchaser, or bondholder, makes to the
bond issuer. Governments, corporations and municipalities issue bonds
when they need capital.es.sentially a loan an investor makes to a borrower. As with loans
vestors expect to receive full repayment of what was borrowed and consistent interest payments.

• National governments generally use the proceeds from bonds to

finance infrastructural improvements and pay down debts.
• Companies issue bonds to raise the capital needed to maintain
operations, grow their product lines, or open new locations.

An investor who buys a government bond is lending the government

money. If an investor buys a corporate bond, the investor is lending the
corporation money. Like a loan, a bond pays interest periodically and
repays the principal at a stated time, known as maturity.
Understanding Bond Markets
The bond market is broadly segmented into two different silos: the
primary market and the secondary market. The primary market is
frequently referred to as the "new issues" market in which transactions
strictly occur directly between the bond issuers and the bond buyers. In
essence, the primary market yields the creation of brand-new debt
securities that have not previously been offered to the public.
In the secondary market, securities that have already been sold in the
primary market are then bought and sold at later dates.2 Investors can
purchase these bonds from a broker, who acts as an intermediary
between the buying and selling parties. These secondary market issues
may be packaged in the form of pension funds, mutual funds, and life
insurance policies—among many other product structures.

TYPE OF BONDS
Corporate Bonds
Government Bonds
Municipal Bonds
Mortgage Backed Bonds
Bond Market vs. Stock Market
Bonds differ from stocks in several ways. Bonds represent debt financing, while
stocks equity financing. Bonds are a form of credit whereby the borrower (i.e. bond
issuer) must repay the bond owner's principal plus additional interest along the way.
Stocks do not entitle the shareholder to any return of capital, nor must they pay
interest (or dividends). Because of the legal protections and guarantees in a bond
stating repayment to creditors, bonds are typically less risky than stocks and therefore
command lower expected returns than stocks. Stocks are inherently riskier than
bonds and so have a greater potential for bigger gains or bigger losses.

Both stock and bond markets tend to be very active and liquid. Bond prices, however,
tend to be very sensitive to interest rate changes, with their prices varying inversely
to interest rate moves. Stock prices, on the other hand, are more sensitive to changes
in future profitability and growth potential.
Advantages and Disadvantages of the Bond Market
Most financial experts recommend that a well-diversified portfolio have some
allocation to the bond market. Bonds are diverse, liquid, and less volatile than stocks,
but they also provide generally lower returns over time and carry credit and interest
rate risk. Therefore, owning too many bonds can be overly conservative over long
time horizons.

Like anything in life, and especially in finance, bonds have both pros and cons:

Pros
 Tend to be less risky and less volatile than stocks.
 Wide universe of issuers and bond types to choose from.
 The corporate and government bond markets are among the most liquid and
active in the world.
 Bondholders have preference over shareholders in the event of bankruptcy.

Cons
 Lower risk translates to lower return, on average.
 Buying bonds directly may be less accessible for ordinary investors.

What Is the Bond Market and How Does It Work?

 The bond market refers broadly to the buying and selling of various debt
instruments issued by a variety of entities. Corporations and governments issue
bonds to raise debt capital to fund operations or seek growth opportunities. In
return, they promise to repay the original investment amount, plus interest.
The mechanics of buying and selling bonds works similarly to that of stocks or
any other marketable asset, whereby bids are matched with offers.
Are Bonds a Good Investment?
 Like any investment, the expected return of a bond must be weighed against its
riskiness. The riskier the issuer, the higher the yield investors will demand.
Junk bonds, therefore, pay higher interest rates but are also at greater risk of
default. U.S. Treasuries pay very low interest rates but have virtually zero risk.
Are Bonds a Safe Investment?
 Bonds tend to be stable, lower-risk investments that provide the opportunity
both for interest income and price appreciation.
  It is recommended that a diversified portfolio have some allocation to bonds,
with more weight to bonds as one's time horizon shortens.
Can You Lose Money in the Bond Market?
 Yes. While not as risky as stocks on average, bond prices do fluctuate and can
go down. If interest rates rise, for example, the price of even a highly rated
bond will decrease. The sensitivity of a bond's price to interest rate changes is
known as its duration. A bond will also lose significant value if its issuer
defaults or goes bankrupt, meaning it can no longer repay in full the initial
investment nor the interest owed.