How Does The Bond Market Work?

A bond is an investment option to make profits over longer periods of time. Often, the terms 'stock and bond' go together whenever investment is discussed.

Bonds are issued by governments and corporations. The government bonds are called 'munis'. These make for attractive investments since they are exempted from federal tax.
Bond is like an understanding entered between the investor and the seller. The latter retains the former's money for a certain period, and pays returns in the form of interest periodically. Some terminologies associated with the investment are:

• Face value: the principle value of the bond.
• Date of maturity: date of return of the client's principle.
• Coupon: interest amount on the bond.
• Yield: depending on the interest, yield indicates the return the bond well fetch per year.

Bonds are grouped into a common class called the Bond Market. Still, they differ from each other in the term, yield and maturity.

Bonds are investment options with a longer term and lesser risk but with lesser return and liquidity compared to shares. Interest on bonds is paid as dividends. Generally bonds are traded over-the-counter among institutions owing to their low liquidity. Some prevalent bonds called 'corporate bond' are listed in the market for trading by small time investors.
The funds allow investors to trade in bonds which qualify certain criteria. One can enjoy the dividends and trade frequently like shares. But it does not return the principle at the end of the term.

One must understand how these bonds perform and invest in them alongside shares to even out risks and increase overall earnings.

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