BOND MARKET
“Bond…James Bond?”
Not exactly!
So now it is the time to clear up what actually bonds are.
Bonds are a form of debts that companies and the government may take to be able to generate their funds and additional capital. Usually, money needed by firms and governments could be sourced externally through taking loans from international or local banks and creditors. But if those loans are having much higher interests or are just not enough to cover the capital requirements, the company or the government will tap the bond market.
There are several kinds of well-known bonds on the market:
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The United States Government Treasury Bonds.
This kind of bonds includes sub-types:
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Treasury Notes (T-Notes)
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Treasury Bills (T-Bills)
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Treasury Bonds
They all are backed by the United States Government, and tax is charged on the interest that the bonds earn. The interest for these bonds usually is low. It is possible to purchase Treasury Bonds with maturity dates ranging from three months to thirty years. This bond, of course, is one of the safest investments in the world (despite current economy situation in the USA)
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Corporate bonds.
This bond is essentially a company selling its debt. Corporate bonds usually have high interest rates, but they also are high-risky (just as a company itself). If the company, selling bond, is gone – its bond become worthless and you may find yourself in the long line of other bond-owners with hope to at least partial refund.
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State and local Governments bonds.
Unlike the federal government bonds, these bonds usually have higher interest rates. This is because State and Local Governments can indeed go bankrupt – unlike the federal government. And if it happens – your bond turns to peace of paper. But the great advantage of this kind of bonds – they are free from income taxes – even on the interest! Some times state and local taxes may also be waived (good and common example - tax-free municipal bonds).
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Foreign bonds – State and Corporate
Purchasing foreign bonds is actually very risky and difficult (you should know everything about the country, selling particular bond, including economy, geopolitical situation etc). That’s why it is usually done through a mutual fund.
The excellent thing about bonds is that you will always get your initial investment back. This makes bonds the perfect investment vehicle for those who are new on the market, or for those who looking for a low risk investment.
