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Bond Basics
types of bonds
 
 
 
 
Bond Basics

What is a Bond?
A bond is a loan issued by an entity such as a government, municipality, or a corporation. Bonds are known as fixed income debt securities. When you purchase a bond, you are loaning money to the issuer. In return, the issuer pays you a specific rate of interest (coupon). You can loan the money for a length of time of your choosing (maturity). Bonds can range in maturity from one week to 30 years. Once you chose a maturity (length) that fits your needs, you will receive interest payments (usually semi-annual) throughout the life of the bond. Upon maturity, you will receive the “face value” of your original investment.

What Bonds Offer
Most investors benefit from a diversified portfolio. A diversified investment portfolio would consist of stocks, bonds, real estate etc. with allocations based upon individual needs and objectives. The role of bonds in a diversified portfolio is to provide a constant stream of income. Most bonds pay interest on a semi-annual schedule allowing the ability to tailor cash flow to meet individual needs. Preservation of capital is another reason to turn to bonds as an investment. Although bonds can be purchased along a wide spectrum of risk, portfolios of highly rated bonds can serve to protect capital unlike any other investment option.

What Investors Buy Bonds?
• Individual Investors
• Trust Departments
• Banks
• Insurance Companies
• Mutual Funds

A broad array of individuals and institutions require a predictable stream of income along with a vehicle to preserve capital. Securing a dependable repayment of capital is helpful when future distributions are needed for retired persons, college payments or insurance companies actuarial needs. Bonds provide a good alternative to the volatility of stocks allowing relative comfort during the desired term of the investment.

Size & Purpose of The Bond Market
The bond market represents the largest securities market in the world. A vast spectrum of issuers utilize bond financing to provide needed facilities for governments and corporations. Financing projects from local schools to International Airports, the size of the market stands today in excess of 39 trillion dollars. The average daily trading volume of the US bond market is over 1billion dollars. The stock market is 1/5th of this amount.

All long-term governmental or private economically vital projects, benefit by the lower costs of borrowing an efficient bond market provides. Roads, power plants, bridges, airports, sewer systems and clean water facilities are all examples of essential projects that would not be financed without the existence of an effective bond market. Bonds provide a vehicle by which cash flows can be spread out over time allowing for greater financial certainty. The dependability available to issuers in turn provides a savings to taxpayers and shareholders.


Listed below are seven major types of issuers of bonds. (In the trillions)

U.S. Treasury: 6.6 Trillion
Federal Agency: 3.1 Trillion
Mortgage Securities: 8.8 Trillion
Corporate Bonds: 6.7 Trillion
Money Market: 3.58 Trillion
Muninicipal: 2.7 Trillion
Asset Booked: 2.60 Trillion