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Bond Market: Is It Really Stable?
How stable is the bond market right now really? With economic woes and problems looking like they are not going to end any time soon, and the stock market going up and down like a yo-yo, many investors are flocking to bonds and staying away from stocks for a time, until the market evens out and becomes less volatile. But are bonds really more stable than stocks? To determine this, first you must understand what a bond is, and how it works.
A bond is basically a security called a debt instrument, and when you invest in a bond you are giving the issuing entity or company a loan for the face value of the bond at maturity usually. The bond market is considered stable, but this does not mean there are no risks involved. A bond usually pays interest either once or twice a year, and then when it matures you can cash it in or redeem it and get back the principal amount of your loan. Once a bond is redeemed the loan is finished. Every bond is different, and will have different terms and lengths. It is important to read and understand all the terms and specifications of a bond before you invest.
Some bonds on the bond market are extremely stable, and these include government and municipality bonds, because they are almost positive not to default. The chance of a town, city, or the United States government not covering their debts is so small it is almost non-existent, and this gives these bonds a level of guarantee that other types of bonds do not enjoy. A bond is only as stable as the entity or company that is issuing it. One way to determine the stability of a particular bond on the bond market is to determine whether the bond is unsecured or secured. This can make an enormous difference in the level of risk you are taking by investing in that specific bond. Bonds which are secured are guaranteed by assets of an equal value, while this is not true of unsecured bonds. If the issuing company closes or files for bankruptcy protection, with a secured bond you have a good chance of recovering your investment once the assets are liquidated or otherwise disposed of. If the bond is unsecured in this situation, you may end up losing your entire investment capital and have nothing but a loss to show for it.
The rate of return for a bond is related to the level of risk the investor faces when investing in the bond. Government and US Treasury bonds pay a very low interest rate, because there is very little risk involved with these bonds. Other bonds may have a much higher interest rate, but they also carry significantly higher risks as well. No matter what bond you are thinking about investing in, it is important to understand that the bond market is very stable, and currently this market may be the wisest option because the stock market has extreme volatility right now. Compared to the other financial and investing markets, right now the bond market is probably the most stable market of all. It is for this reason that many investors are turning to the bond market, instead of trading and investing on the other markets for bigger investment return potential.
The information supplied in this article is not to be considered as medical advice and is for educational purposes only.