In this article of the Economics Guide, you will find a lot of detailed information about bonds , an important investment tool in the market . In our previous article, we explained the Bond Market with its basic features. In this article, we will explain the deeper characteristics of bonds, their comparison with stocks and the risks of bonds.
WHAT IS BONDS?
Bonds are a kind of securities placed on the market by governments, municipalities and companies. Bonds are debt payable to the above-mentioned institutions, which must be repaid when due. These institutions issue their own bonds in order to eliminate their cash requirements and in return the required cash is obtained. The investors who lend money to the above mentioned institutions in return for bonds receive interest income paid at regular intervals or at the end of the term. Newly issued bonds can be obtained from the primary market, directly from the related institution or company, or from the secondary market, ie from investors who previously held bonds. Interest is the basic element in buying and selling bonds. The borrower in exchange for the bond pays interest to the issuer at certain intervals. Thus, investors who want to obtain this interest income purchase bonds while institutions that need to collect money and which need cash meet their needs.Bonds have different maturity and interest rates.
- Bonds with maturities up to five years
- Bonds with maturities between seven and ten years
- Bonds with maturities more than twenty years are grouped as long-term.
Generally, long-term bonds have more interest yields than other bonds. At the same time, bonds often move in the opposite direction to the stock market. Therefore, for investors who want to reduce their risks, bonds are a very good instrument.
SHARE CERTIFICATES AND BONDS
Stocks are directly affected by the success and failure of the company and the development of the company. Therefore, value increases and decreases are experienced in stocks. This leads to trading opportunities for investors. In our previous articles, we have mentioned about Stocks in detail.Bonds are not affected by the situation of companies. Investors receive interest income on a regular basis unless the companies are in a very difficult situation and become unable to pay. At the same time, the borrowed money is taken back at the end of the term. In these respects, bonds are frequently preferred by investors who do not want to follow the market and want to receive interest income on a regular basis.
Generally, government bonds are less risky than other types of bonds. The reason for this is that states will not sink easily. In investment instruments where the risk is low, the profit is relatively low. In other words, the interest rates of safer bonds are less. Bonds that offer more interest income than the interest rates to be obtained from banks are preferred due to the fact that they generate regular income and are not directly affected by the situations of the companies.