Bond Essay

Decent Essays

What is a Bond? Bond, James Bond. I know, super corny, but I could not help it. Everyone is obsessed with the stock market and the financial news never stops discussing every detail. However, if you have any kind of managed fund it is 99% likely that you own some bonds and probably don’t even know it. Bonds remain an enigma, the secret agent of finance that is always present, but somehow never noticed. So why should you care? Capitalism is an expansionist system built on constant growth, which often relies on the capital markets. Whether you like it or not, this system exists to provide mutual benefit for those that need funding and those that can provide it. Therefore, having a basic understanding of how the market can benefit an …show more content…

That leaves selling bonds. There is plenty of mutual benefit in this arrangement because a bond is a loan from an investor instead of a bank. Like any loan, a bond contract pays interest on a fixed schedule and repays the principal to the investor at a stated time. Issuing debt (bonds) instead of equity (stocks) is referred to as leverage financing because the issuer is borrowing against its net worth (quantifiable) and not its equity (fluctuating). Why is the bond market something that you should care about? First, the bond market has always been twice the size of the stock market, yet it is often ignored. Therefore, if you know how to find deals, there is far less competition searching for those. Second, bonds are predictable and stable. With stocks there is no guaranteed return and no matter how much risk you accept you can still take a loss. Third, with bonds you can directly invest in initiatives that matter to you. To issue a bond a firm hires to a bank to do the underwriting and to manage the cash flow. When the due diligence is done, the lead/agented bank creates an individual bond number called a Committee on Uniform Securities Identification (CUSIP) number that an investor can buy. Essentially this is just creating a loan, but breaking that loan up into small parcels and selling those individually. Therefore, you buy an individual bond and the CUSIP belongs to you until you either sell it, the firm

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