Foolproof Explanation About Bond Market for Dummies

Foolproof explainaion

When looking for banking and finance news, people do so with the stock market in mind. This is the common knowledge but there is another thing that you must know about if you want to have a full analysis of the financial markets – the bonds.

Why Interest in Bonds Is Lower Compared to the Stock Market

People around the globe get excited every time news is out about the stocks of companies. Even when some significant event happened like civil uprising or a coup d’état, investors automatically predicts how this will affect the stock market. Yes, everything is about stocks, but why is this so? Why would you invest? The answer is to make profit right? Investing in bonds though will take time before your investments make some money. More are interested in stock market rather than bonds because the prices in the latter do not change that much compared to the former.

The Scope of Influence of Bond Market

Looking back at history’s records will make you realize how much effect the bond market has over us. It was reported by the NBC news that the government approved a $700 billion bailout package to buy the mortgage-related securities. It was not long ago when all of this happened, and the economy of the US and the world suffered. The cause for it was the disturbance in the market of fixed income or more known as the bond market.

How the Bond Market Affects the Government

The governments are the highest and most important spender in a country. Now, bonds allow governments to raise a big amount of money that they spend on infrastructures like school buildings and roads. Corporations on the other hand also benefit on this, as they are able to give jobs to their workers by providing goods and services to the government projects. As you see, this is like a circular cash flow where if the bonds stop producing money for the government, the economy will suffer because the private sector is also affected.

Understanding the Basic Concepts About Bonds

Bonds in essence are documents that are sold by an entity, a corporation or a government, with an interest so that it could gain profit. It is like having a loan where the bond buyer gives money to the bond seller, who is the borrower. Bonds are like this, but in a document form and on a wider scale. Only three kinds of bonds will be discussed here which are:

  • Corporate bonds
  • Treasury bonds, and
  • Mortgage-backed securities

These are based on the US market bonds because it has the greatest influence in the world economy though latest news in finance shows that bond market of other continents like Europe and Asia are on its tail.

Lend Your Help to Corporations by Buying Corporate Bonds

As the name implies, corporations practice this where they use the bonds in lieu of applying a very big amount from a bank that could not be possible. Offering a new stock is also out of the question as this could siphon the existing shares that could lead to a more complicated financial situation. Corporate bond buyers become the creditors and are prioritized in having their money back in the event of bankruptcy.

Engage in a Risk-free Investment With Treasury Bonds

Treasury bonds are the most known bond in the US where US treasuries is used by the government for its financial needs. This is claimed to be risk-free because having business with the government is safer compared to banks. Even the fixed deposits in a bank could be affected if it would go under. The US government on the other hand is considered as one of the most liquid market in the world, making your investment safe.

Mortgage-back Securities

Mortgages of a group of homeowners are packaged into a bond to be sold to an investor with the goal of providing a housing loan for possible homeowners. The monthly payment of homeowners for the interest and the principal amount will also be pooled together to use as payment for the buyers of the mortgage-back securities. This type of bond was greatly affected in the past when the US’ housing bubble popped. This situation in the bond market affected not only the US, but also the whole world, with US being one of the major players in the world economy.

Talking about bonds is a complex topic and what are covered here are points to give you a general idea about the bond market. With this, you are able to see how the bonds, aside from stocks, can affect the economy. Read more business news finance to know more about bonds.