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Bond is a fixed income instrument that can help you diversify your portfolio. The bond market is big and diverse and here we will try to make sense of some of the terms that will help you have a deeper knowledge of the bond market.

Characteristics of Bonds
Face Value
It is the original cost of the loan which you are going to get back when the bond matures. It is usually $1000. Usually bond prices begins to fluctuate once they resume trading on the secondary market. But at maturity, the bond issuer pays the bond holders the face value of the bonds.

Maturity
The is the day the bonds come due. It is the date the bond investors will get their money and the bond issuer will end all its obligations. A five-year bond matures after two years. A ten years bond matures after ten years. Most bonds mature at least within 30 years of issue. But there are still short-term bonds that mature after just a year or two. Those kinds of bonds are usually called notes.

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Bond Yields
Bond yield is the amount of return you are going to get for investing in a bond. It is the sum total of the profits you are going to make by the time the bonds matures.

Coupons
Coupons are the amount of interest paid to bond holders. These interests are usually paid annually or semi-annually. When you invest in a 10-year bond that has an annual coupon payment of 7%. It means that for the next ten years, an interest of seven percent will be paid into your bank account.

Call-ability
If a bond is callable, it means that the issuer can pay back their obligation to the bondholders before the maturity date. A ten-year bond can be called back in six years if it has a call option embedded in it.

Bond Rating and Risks
Rating Agencies.
Credit Rating Agency is a company that evaluates the financial conditions of debt issuers and assigns credit ratings which rate a debtor’s ability to pay back the debts and the likelihood of default.

Standard & Poors, Moody’s and Fitch dominates the rest of the world.



If a country or an organization have a low evaluating from any of the trustworthy rating office, it implies that the nation or organization is probably going to default in it’s obligation commitment. Regardless of whether they prevail with regards to bringing reserves up in the security showcase, they must will to pay high coupons on the bonds to pull in financial specialists.

Be that as it may, a nation or nation with high appraising like AAA to Aaa will raise finances effectively at low coupon rates since they can pay back the obligations.

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Bond Risks
Investing in bonds can be a great investment especially when it comes to preserving one’s capital. But bonds investors are exposed to a lot of risks. Chief of those risks includes:

Interest rate risk
The interest rate risk is the biggest risk that affects the bond market. There is a negative relationship between the prices of bonds and interest rates. That is, the higher the higher the interest rates, the lower the prices of bonds and the lower the interest rates, the higher the prices of bonds.

This happens because if interest rates go down, investors would want to buy bonds that have higher coupons, increasing the demand for bonds and therefore pushing it’s price up. On the other hand, if interest rates go up investors don’t care about what is going on in the bond market. Their indifference naturally pushes the prices of bonds down.

Inflation risk
Bond investors also have to deal with inflation risks. Because bonds are fixed income instruments they are affected very much by changes in prices. If you invested a Ten thousand dollars in bonds that will mature in ten years at 7% annual coupons. But by the third year since the bonds were issued inflation rose by more than 10%.

If the inflation rates stayed like that for the remainder of the seven years, you most have achieved a negative return because the high inflation has eroded the purchasing power of your money.

Default Risk
At the point when a bond insurer is not any more ready to reimburse its commitment, that is the point at which a default happens. Before you purchase a bond, the default hazard in that bond is the probability that one day, the issuer won’t have the capacity to reimburse the obligation.

Default risk is for the most part higher in corporate bonds yet financial specialists still go for broke of purchasing these bonds on account of higher coupon rates.

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