Bonds and The Bond Market Essay

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Bonds and The Bond Market

Given today's uncertain economy, many people are taking time to examine various options for their financial future. Different types of investments are investigated and bonds are one of the more popular choices considered. Many of the same people who talk about investing in bonds, however, do not fully understand them nor where they place in the economy. Many individuals believe that they should simply buy a bond and wait until it matures before cashing it in. These people fail to realize that they may be losing a lot of money due to the fluctuation of bond prices. At some point it may be more profitable for them to sell
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As shown in the chart on the following page, the return rate on bonds has surpassed the inflation rate. Bonds have averaged an interest rate of over six and a half percent, while the inflation rate has averaged under four and a half percent. Although it may seem like an insignificant amount of interest, over time, this difference in interest rates can lead to extremely large profits. If you invested $1 000 dollars in bonds in 1950, by the end of 1995 you would have acquired $17 630. While according to the Consumer Price Index (the cost of living rate), you would only need $7 000 to have the same buying power that you would have had in 1950. That is a difference of $10 630 in purchasing power that you would have gained. This increase in purchasing power seems very significant; however, you must also realize that these profits do not include the numerous times when you could have sold out of your bond for an even greater return. You must also realize that the large difference between bonds and stocks is not fairly represented as well. Although the stocks show a $79 750 increase over the inflation rate, you must keep in mind that stocks carry a lot more risk than bonds do; this volatility could lead to an enormous loss in money if your money is not invested in the

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