The bond market, naturally, refers to the buying, and selling, of bonds. A bond is an agreement between an entity (perhaps a corporation, or even a national government) and a lender (bondholder) to repay the loan after a specified period of time - with regular interest payments often commencing immediately.
The idea behind a bond is that when an entity requires a large sum of money, as a loan, and is unable to obtain it from a lending agency (or cannot do so without exorbitant interest rates), the entity can issue bonds of far smaller value to interested private investors. In this way, the cumulative effect of numerous individual bonds can raise the necessary funds as well as if they had been secured as a singular loan. As a bonus, bonds can be offered to last a predetermined length of time, leaving the decision on when it must be repaid entirely in the hands of the issuer. This luxury cannot be stretched too far, however, if they are to attract enough willing investors.
This brings us to discussion on the trading of bonds. There are numerous reasons for a bondholder selling off his bond with a company. He may need the money urgently to sort out personal matters, or perhaps to fund a more lucrative investment. Alternatively, he may be interested in selling simply because he has no further interest in his investment. While the reasons for sale are diverse, the method, and effect of such a sale are largely simple.
When a transaction is done, on the bond market, the original bondholder receives cash for his bond, a sum which will vary depending on the value of the bond, and the amount of interest still to be paid. Upon successful sale of the bond, the original owner forfeits all claim to the original loan, or further interest payments. These become property of the purchaser upon payment. This is, essentially, the principle behind how bond markets work.
While most transactions, involving bonds, are done over-the-counter, exchanges do exist on which bonds can be listed to for sale to interested investors. The largest of these is the New York Stock Exchange, despite its name, and handles a large volume of bond transactions daily. Most of these involve corporate bonds, those offerred by corporations seeking to raise money but that are uninterested in issuing, or selling, more common stock, or have already exhausted this option. Other, smaller exchanges handle all types of bonds - even those issued by governments.
Bonds are a guaranteed rate of income, making them a more stable investment choice with minimal risk. At the same time, it should be noted that, unlike other investment types, the earning potential is limited with no possibility of increase, despite favorable market conditions. Additionally, although bond markets clearly exist, bonds are still not very liquid, relative to other investments, and can be hard to sell, should the need arise. For investors seeking steady, but limited, return on investments, however, the bond market is an excellent option to consider.
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