Everything There Is To Know About Trading Instruments - Bonds
December 3, 2018 (Investorideas.com Newswire) If you're new to this entire concept of investment, why should you do it, and the role of money market trading instruments, then this article will help you understand all the basics related to these concepts. While there are several types of money market instruments that help a usual investor in sorting out funds and investment decision, there's a special type of instrument which even the government deals in, and most of the time is a sure shot investment return guaranteed. This trading instrument is known as a bond. Bonds, if still unclear, are written documents or certificates depicting an obligation to pay off the debt off a creditor or a person who's otherwise lent the individual, firm, company, organisation, or the government some money.
How do bonds work
Bonds are a form of borrowing which flows along the same lines as Debentures, but slightly different. The difference here is that, the company or individual taking the money have to treat it like a loan. And like any other loan, it to be repaid after a given period of time. Likewise, the lender is entitled to get a significant percentage as a part of the interest that needs to be paid. The main reasoning behind the 'interest' factor is that no general consumer, or the public as a client, will give out their hard-earned money as a part of a loaning scheme if they weren't getting reimbursed appropriately. Bonds can, however, be of variable time periods in order to make it easier for the firm to pay a large amount. Nonetheless, the profits that the company or individual earns does not determine the interest that is to be paid to the lender as loan doesn't have a part in profits. Besides, the interest is given to the lender on account of the total sum loaned by him. At most, profits only make it easier to pay off the interests. This makes bonds, as a whole, very peculiar trading instruments. They, however, are an extremely safe and secure way of investment but still ensuring returns in the form of interest.
Types of bonds
Now that the entire concept of 'Bonds' has been explained, lets jump to the topic of how many bonds exactly are there. Looking at this entirely from an introspective, bonds can have several types depending on where they're being used as standard trading instruments. However, a basic structure formulates bonds into mainly two-three categories. And while there are different types of bonds known, their major functions remain the same. It's just the place of investment that makes the bonds different. Here are the main types of bonds: -
- Government bonds - As the name suggests, government bonds are issued by the government or some similar legal authority, or any organization holding or exercising legal power. The government usually releases bonds in order to receive some financial help for special projects like tender of a defense project, foreign exchange, outside trading, etc. The bonds released by government are usually called 'sovereign bonds. However, they are very commonly known as Treasury Bills, Treasury Bonds, or simply just Treasury Notes. Since it is government's liability in the form of a trading instrument, all the bills purchased are said to be the safest and securest form of investment into the growing market level. It really does create a wonderful market opportunity for general consumers, and the public if they're interested in investing but want the safest way in order to get decent returns. Such bonds are, sometimes, also used to manage fluctuations in the emerging market conditions by borrowing money from the public and increasing the cash flow in the economy during times of extreme inflation.
- Corporate bonds - These are exactly like the Government bonds but with the guarantee of higher returns and variable investment lengths. In Corporate bonds, there are three further types of bonds distinguished by their maturity periods. If the bonds financial duration is less than five years then the it is a short-term investment. Similarly, intermediate is for bonds maturing anywhere between five to twelve years, and long-term investments refers to bonds having a maturity period of more than or anywhere after the completion of twelve years. As exclaimed above, they offer a higher rate of interest on their bonds. However, Corporate bonds are further divided into two types - Convertible and Callable bonds. Convertible bonds are basically bonds which, at the end of their maturity period, give the bondholder the option of converting his/her bonds into stocks of shares at a later date whenever convenient. The choice is absolutely upto the holder. This is a way of terminating their liability. Nonetheless, this is recommended if you're getting a higher return from investing in the company's stocks. And the other type of Corporate trading instruments given are Callable bonds. These are basically bonds giving the option of being pre-redeemable before their actual maturity period. They have a higher interest rate in order to induce holders to accept this. However, they have a very distinct risk to it. Although the repurchase price is set while distributing the actual bonds, the overall risk factor is tremendous.
- Asset-Backed bonds - The last type of bonds for this article are these. Such bonds are basically given out by banks or similar financial institution as ABS (Asset-Backed Securities). However, if they're backed by mortgages instead of assets then they're called MBS (Mortgage-Backed Securities). Such bonds are kept separate only for experienced and previous investors and not just any
Conclusion
Bonds are probably the safest trading instruments while getting into the financial market to earn money. They usually have a fixed rate of interest and an increase in profit margin doesn't mean an increase in interest margin, as it is pre-decided. However, they are the safest way of investing into the dynamic market conditions. Your earning depend according to the type of bonds you choose. Some might give huge yields but with a greater risk factor while the other might pay a minimal one at the lowest risk factor. The choice is just up to you to choose from.
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