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Everything You Need To Know About The Bond Market

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Bond Market 101

As children, most of us expected to receive our favorite board game or movie on our birthday. “Present time” was spent oohing and ahhing over new gifts that sparked our interest, and thanking the generous party that provided the gift. Oh, the days of simple board games!

I definitely received a fair amount of games, books and movies for my birthdays as a child.

In contrast, I do remember a few times when my grandparents decided to switch up the present game, and give me something that had a little more long-term value than Monopoly or the newest Shrek movie.

Several times during my childhood, my grandparents decided to give me US savings bonds as part of my birthday present!

At the time, I definitely didn’t understand what the phrase “face value” meant or why I couldn’t use these official-looking pieces of paper to fund my next trip to the dollar store.

Where should I even hide them for safekeeping so that I didn’t forget in 10 years I would have “real money” as my parents explained it?

Now, as the value of those decades old bonds have matured, I am reaping the benefits of the investments my grandparents made.

A few years ago, I took several to the bank as I was buying a new car and was pleasantly surprised at how helpful the funds were to me in adulthood. My grandparents’ planning and investing had paid off at just the right time! (and, I had kept the bonds in a safe location for the years of waiting!)

After I cashed these bonds and chatted with the bank teller about what exactly a bond was, I wanted to do a little digging to find out the latest on bond investing, and what the main goals of investing in a bond would be.

Was this something I should invest my current portfolio in? Should I be the parent or grandparent who gifted these at parties?

Speaking of bonds, you might have heard the phrase bond market being used to describe where bonds are traded and bought.

So I began to investigate the bond market, also known as the credit market or debt market. 

Typically, when we think of the word “debt,” negative thoughts come to mind! Debt isn’t a happy subject for most, and for some of us it’s something that might have inhibited our financial freedom for a time.

Most of us don’t associate debt with success or gain! And most first time investors aren’t dying to start “investing in debt,” or as it might be more widely known, buying into the bond market. 

However, if you’re buying a bond, consider yourself a lender! You are providing funds for a specific organization or project that should be paid back later at a higher rate.

You have the “upper hand” in a sense, as you lend money to a party who needs your funds. 

There are definitely perks to purchasing bonds. Most investors consider bonds to be lower risk, and therefore a great option if you need to diversify a risky investment portfolio.

Sometimes, you can even count on income from bonds, as they will pay out interest at regular intervals. Does your investment portfolio need a few lower risk options to achieve the amount of total risk you’re comfortable with? Look no further than the bond market.

Bonds & the bond market 

You might be familiar with war bonds, pretty well known as a traditional way to pay off war debts or expenses by selling securities that investors can buy in hopes to see a return on investment later.

The main purpose surrounding bonds is to fund a project or pay off a major debt. The investment used to purchase the bond (your money!) is necessary for the organization offering the bond to complete these specific endeavors.

Several main types of bonds make up the market: 

Government Bonds – these bonds are probably the most familiar to most of us. These were the first types of bonds to be issued (like the aforementioned war bonds). 

Corporate Bonds – these are bonds issued by a publicly traded corporation to fund a specific project or debt. They make up the majority of the US bond market.

One way to see this type of bond is as an alternative type of funding for corporations, rather than adding onto their loan balances or having individual investors buy shares of their company. 

Municipal Bonds – local or state governments can issue this type of bond for projects they have underway, or debts from past projects. One perk of municipal bonds is the fact that they might not be taxed at a state or federal level.

A few other terms to understand when beginning to invest in bonds include the bond maturity date, face value, and coupon payments.

A bond maturity date indicates the time at which the bond will reach its maximum value. This maximum value you will receive when you redeem the bond is termed the face value. Coupon Payments are the possibility of interest being paid out in regular increments, like we noted before.

Okay, so now you might want to get out there and invest in bonds. The more I found out about bonds the more I thought maybe my grandparents were onto something. But how and where do you begin? 

There are two different “exchanges” that enable investors like you to purchase or trade bonds:

Primary Exchange – with this exchange, think of a larger investment. This is where an initial offering of bonds is made. A bank or larger institutional investor will typically purchase bonds and might later distribute to investors for a set price. So it’s probably not for your typical investor, but for a larger organization.

Secondary Exchange – after this initial offering of a company or government entity, a bond can now be purchased over the counter (usually at a bank). This is how my grandparents purchased bonds in my name.

Also included in this secondary exchange category, you can buy into bonds through mutual funds that include bonds in their make-up. This can be an easy way to add diversification to your portfolio! This is the option I decided to go with, since I didn’t necessarily trust myself to keep track of physical bond notes, but I still wanted to diversify my holdings.

Whether you just heard of bonds for the first time today, or you’ve been considering adding them to your financial plan, they are a great option for some investors to diversify their holdings. 

Maybe the next time you attend a niece or nephew’s birthday party, you’ll be the family member gifting bonds and setting them up for a brighter future!

Contributor’s opinions are their own. Always do your own due diligence before investing.

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