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A bond is a security wherein the issuer agrees to pay the holder a principal plus the interest after an agreed period of maturity. A bond market, also known as the debt market, credit market or fixed income market, is the place where bond securities are traded.
Bonds vs. Stocks
Bonds and stocks are two kinds of financial securities. The main difference between the two is that stock holders are owners of the company, whereas in bonds, the bond holders are creditors or lenders to a company that issued bonds in the bond market. Given the two different situations, another difference that could be pointed out is that stocks have varied income (or loss), while bonds are fixed income securities and possible losses are covered by guarantees in the bond market.
Types of Bond Market
The Securities Industry and Financial Markets Association (SIFMA) classified five types of bond market:
- Government and agency bonds
- Municipal bonds
- Corporate bonds
- Funding bonds
- Mortgage-backed or Asset-backed bonds (or debt obligations with a collateral)
Investing on the Bond Market
Nowadays, government bonds (or sometimes called treasury bonds or T-bonds) are being offered as a more secure and lucrative investment option, where risk is minimal compared to stocks and other types of bond market.
Bond valuation is inversely proportional to interest rates. When interest rates soar, the value of bonds goes down, and consequently, when interest rates dive down, the buying price in the bond market goes up. The power of the government to regulate the increase of interest rates protects the bond market from sudden decline.
The government bond market was considered the most secure among all bond market types. It is also the largest and most liquid among the the five types of bond market. For those who bought bonds and waited to claim the coupon upon its maturity, the volatile nature of the bond market usually becomes irrelevant.
Unlike other forms of security, income from the bond market may be more guaranteed and secure. The bond market is far safer than depositing your money in a bank to earn timed deposit interest because the banks follow interest rates dictated by the market.
The bond market is growing fast with the introduction of bond funds, wherein individual investors are allowed to participate.