The bond market. You may think you haven’t heard about it. You are probably wrong. In addition to occasionally hearing about “rallies” in the bond market most Americans has heard of the $3 trillion deficit the U.S. government currently faces. What makes up this deficit? Treasury bonds. These bonds and other securities the U.S. Treasury issues help fund the activities of the U.S. Government and have an integral role in the bond market. The bond market is comprised of many different types of bonds which can greatly vary in features. Let’s explore some basic functionality.
- A bond is a debt security that obligates the borrower to pay a specified amount to the investor on a given date and usually includes coupon payments.
- A bond offers investors returns through appreciation and interest (coupon) payments.
- A bond has many distinguishing features including par value, maturity, coupon rate, issuer, credit rating.
- There is an inverse relationship between bond yield and bond price.