What is the Bond Market?

What is the Bond Market?

The market for trading debt securities like government bonds, corporate bonds and tax-free bonds is known as a bond market. So it is a market to sell and purchase bonds, which are fixed-income instruments that signify a loan forwarded by an investor to a borrower.

A bond market is generally less volatile than an equity market and is more suitable for investors with lower risk tolerance. The bond market helps the government and large private entities access long-term capital.

Types of Bond Markets

On the basis of buyers, bond markets are classified as primary market and secondary market. The primary market is the one where the original bond issuer directly sells new debt securities to investors. The bonds bought in the primary market can be further traded in the secondary market. The liquidity of bonds is judged by the ease of buying and selling bonds in the secondary market.

Types of Bonds

There are two broad categories of bond instruments, referred to as secured bonds and unsecured bonds. The fundamental difference between these two types of bonds is that secured bonds offer collateral to investors while unsecured bonds do not offer any collateral. The security offered by collateral bonds make it a low-risk good investment even at low rates of interest. Collateral bonds are suited for investors with lower appetites for risk in their investments. Investors choose unsecured bonds based on the credit-worthiness of the issuer.

There are also several other categories of bonds which are based on the terms and conditions set by the issuer, the rights and obligations of the investors, and the type of the issuer.

These categories of bonds include convertible bonds (further classified as regular convertible bonds, mandatory convertible bonds, and reverse convertible bonds), government bonds (further classified as fixed-rate bonds, floating rate bonds, sovereign gold bonds, inflation-indexed bonds, and 7.75% GOI Savings bonds), bonds with call or put option, zero-coupon bonds, retail bonds, and junk bonds.

Things to Consider

The things to consider when investing in bonds is to check the creditworthiness of the issuer, the prevailing interest rate and the bond yield or the returns offered by the bond. It is also important to consider the risks associated with investing in bonds, the ease of sale of bonds in the secondary market or the liquidity, and the tax implications.