the Wealthy Canadian

Bond markets usually consist of debt securities that are traded between participants as an option to trading in stocks. Unlike stocks, bonds bear greater liquidity and generally lack the risk that stocks carry. Bonds are made up of a myriad of categories including fixed income bonds, corporate bonds, government bonds and municipal bonds. The bond market is an active one with considerable size. In fact, the global bond market is said to be worth over $45 trillion, with the U.S. alone making up $25.2 trillion of those dollars. With over $923 billion dollars in daily trades, the bond market is nothing to sniff at and bears an importance that all investors should examine and include in their portfolio.

Fixed income bonds are traded securities that are guaranteed to pay off a regular interest or coupon to the investor. These bonds behave somewhat as preferred shares issued by corporate entities (except that a bond is a debt, whereas a share is equity). When you are looking to purchase fixed income bonds you should be aware of the following terminology.

Like a loan, the “principal” of the bond is the amount that the holder has lent the institution for capital. The interest that the borrower agrees to pay the bondholder is referred to as the “coupon.” Bonds are sold with a certain life expectancy. When that stated time period is up, it is said that the bond has matured and the money lent is to be returned to the bondholder. When the bondholder enters into an agreement to purchase bonds, it is said that they receive issue (bond) from an issuer (entity that is borrowing the money) and the two parties formalize an indenture (the contract).

In the next segment, we will discuss the differences between government and corporate bonds.

Missed the first posts in the series?
Bond and debentures