Bonds And The Bond Market Essay

3860 words - 15 pages

Needs some more interesting content Very good. Well organizedBonds and The Bond MarketGiven today's uncertain economy, many people are taking time to examine various options for their financial future. Different types of investments are investigated and bonds are one of the more popular choices considered. Many of the same people who talk about investing in bonds, however, do not fully understand them nor where they place in the economy. Many individuals believe that they should simply buy a bond and wait until it matures before cashing it in. These people fail to realize that they may be losing a lot of money due to the fluctuation of bond prices. At some point it may be more profitable for them to sell their bond than to keep it until the payment date is reached.There are many people who do not understand what bonds really are. A bond is an agreement between two separate entities. One of these bodies gives, to the other, use of their money for a period of time and, in return, may receive a 'bond'. The bond issuer agrees to a fixed rate of return which he will pay the supporting person or business. This fixed rate of return is an amount, in percentages, which is paid at regular intervals until some future specified time ( the 'maturity date'). Upon reaching the maturity date, one's original investment is returned to them.As previously mentioned, bonds are one of the more popular types of financial investment in today's economy. There are many reasons why people invest in bonds. For example, if one chooses a stable and profitable bond, it will provide a steady source of income through interest payments during the lifetime of the bond. As well, the risk when investing in a bond is considerably less than for most other forms of investment. The bond does not, for instance, experience the volatility of a stock on the stock market, like many other forms of investment do. Also, in instances where the issuer fails to pay the principal amount back to the bond holder, legal recourse is available. Furthermore, in cases of bankruptcy within large corporations with stock holders, bond holders take priority and are guaranteed payment before stockholders.During the past forty five years, bonds have experienced their ups and downs. As shown in the chart on the following page, the return rate on bonds has surpassed the inflation rate. Bonds have averaged an interest rate of over six and a half percent, while the inflation rate has averaged under four and a half percent. Although it may seem like an insignificant amount of interest, over time, this difference in interest rates can lead to extremely large profits. If you invested $1 000 dollars in bonds in 1950, by the end of 1995 you would have acquired $17 630. While according to the Consumer Price Index (the cost of living rate), you would only need $7 000 to have the same buying power that you would have had in 1950. That is a difference of $10 630 in purchasing power that you would have gained. This increase...

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