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Chapter 16 — THE BOND: WHAT IS IT?
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THE BOND: WHAT IS IT?

THE BOND: WHAT IS IT?

Bond is one of the fundamental types of investments. This is a tool that companies, banks, and government entities use to raise funding. The Bond is an investment that pays interest according to a fixed rate and fixed payment schedule. Compared to the stock, the bond is much more stable because it pays according to a fixed schedule. While bonds typically do not earn as high of a return as stocks, they are favored by some types of investors because of their guess-free return.  This types of investments is sometimes referred to as fixed-income investments because of its known returns.

the bond

However, there are dangers associated with buying them. While the bonds’ returns may have a fixed schedule, the rest of the economy continues to move around them. Long-term bonds may not earn a high enough return to keep up with inflation and investors will often achieve higher returns from stock investments. Bond transactions also carry commissions, which can affect the profitability of the investment.

It should be noted that there are many types of bonds which might include options such as calling the bond (buying the bond back before maturity) or, converting the bond (exchanging the bond for shares of stock).

The Federal Reserve issues treasury securities on behalf of the United States Department of the Treasury. They can be Treasury Bonds, Treasury Bills, Treasury Notes, or Treasury Inflation-Protected Securities (TIPS). The Federal Reserve is a non-profit organization whose stated mission is to secure the financial stability of the United States. Profits from the sale of securities are utilized by the Department of the Treasury. None of these investment options yield a very high return, but they are often looked at as the benchmark for risk-free investments because they are issued by the United States government. This is the most important part of treasury securities because it means that they have virtually no chance of defaulting.

Movement in the treasury security market can be counterintuitive. When the Treasury securities prices go up, it is sometimes considered a bad sign for the economy because it means that investors are fleeing to the “safest” investments. On the other side, if the treasury securities market goes down, then it is generally a good sign that the rest of the market is picking up. However, the T-bills and T-bonds often move opposite of each other because the T-bills are short-term notes (usually measured at 3-month intervals) and the T-bonds are 10 years or more. The individual investor can be deceived by movements in the Treasury security market because they are affected by large institutions, can be confusing, and may not be a reliable indicator of what moves to make in the rest of the market over the very short term (i.e. that given trading day or week).

Quiz

A bond is

Correct
Incorrect
0/76 (0%) Correct
  • 1
    Another way of buying stocks
  • 2
    An investment that pays interest on a fixed schedule
  • 3
    A connection between the investor and a company
  • 4
    None of the above
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