07 Jun Why bond markets go up and down
Whether it’s building infrastructure, growing a business or investing in equipment, governments and corporations often need to raise funds for their operations. Issuing bonds is a common way to raise the money they need.
What is a bond? It’s an IOU from a corporation or government to an investor. Issuing bonds means that the face value of the bond (known as the principal) must be repaid on a due date (maturity). Investors will also earn interest on the bond, otherwise known as the coupon. The coupon is calculated annually as a percentage of the bond’s face value.
People choose to invest in bonds for “a perceived predictability in future cash flow,” says Shailesh Kshatriya, director of investment strategies for Russell Investments Canada. “If the bond is paying 5%, 10% or whatever the coupon rate is, your belief is that there is a high degree of predictability and certainty that you will get that cash flow over time.”
There are four major types of bonds, each of which have their own market:
- corporate bonds, which can be used to finance operations or business growth;
- government bonds, which repay the face value of the bond on the maturity date with periodic interest payments;
- municipal bonds, which are issued by local governments to fund projects; and
- mortgage bonds, which refer to pooled mortgages on real estate properties.
Though bonds are often thought of as safe investments, bond prices can fluctuate for several reasons. To read these reasons and the rest of this article by Advisor to Client, CLICK HERE. If you have any questions be sure to contact Harry Perler or David Olejnik.