Bond Market Basics
A bond is a loan issued by an individual or investor to a company or a government. The bond issuer pays income in the form of interest payments that are made at a predetermined rate and schedule.
The interest paid on a bond is often called a “coupon” and the date the issuer must repay the loan amount borrowed is called the maturity date.
Most bonds have fixed interest (coupon) rates, so to adjust for future expectations the bond price moves up or down based on yields changes. If the interest goes up on bonds the price of your bond will fall to accommodate the higher yield, the opposite is true when yields fall, the price of bonds has to go up.
Why buy bonds?
Bond markets offer liquidity and diversification along with a more conservative type of investment than common stock or other equities.
The economy and inflation drive the market so the bond market is a measure of interest rates.
Start your bond strategy with 5 to 10 year maturities and trade multiple contracts or purchase using a ladder approach buying at different maturities and rates.
With interest rates at historic lows the risk of inflation and interest rates climbing are very likely. If so the value of the existing bonds will decline unless you hold the bonds until maturity.
Daniel Iuculano, AAMS CMFC
Financial & Wealth Planner