Similar to stocks and shares a trader must have heard about bonds. It is also an option in trading that generates profit for the investor. Bonds are defined as a loan from an investor to a government or a company. The investors get payments on decided interest rate at which the bond was sold.
Well, investors do trading among themselves, but bond is traded through dealers called as bond dealers. They offer liquidity for bond investors making buying and selling of bonds easy for investors. But dealers have an authority to buy and sell among themselves either through bond brokers or maybe directly.
With bond investor, it does not mean an individual, but it could be any financial institution, government or mutual fund.
Increment in yield on portfolio is the foremost reason why investors want to trade bonds. Yield is return on bond maturity a bond investor expects to receive. Even the investors expect to maximise it.
This is used if the investors have a plan to upgrade debt issue in future. Upgrading on bond increases the price of bond and decreases yield. If a credit rating company upgrades then it implies that a company is less risky and has improved its position in market. In this trade, investors always attempts to catch price by purchasing bond before any credit upgrade.
When instability increases in market, some sectors become vulnerable on their debt obligations. So the trader has no other option besides adopting more defensive position. They try to gather money from sectors that are expected to be poorer and uncertain.
Also, the companies that may have a chance to go in losses also choose credit defence trade.
In this trade, the investor re-allocates capital to those sectors that outperforms in an industry.
In this the duration of the bond changes to gain sensitivity to interest rate, depending on direction of interest rates. Price of bonds and interest rates are correlated. It means increase in price leads to decrease in rate and vice-versa.
Well, we are talking about bonds and reasons to invest in them. But do you know types of bonds you can avail?
There are treasury bonds, municipal bonds and corporate bonds.
Talking about treasury bonds, they are issues by U.S. federal govt. This is a safe investment option as the government has a right to print money and increase tax to meet financial obligations.
Municipal bonds are issued by country state and local municipalities to provide funds for road maintenance and other building projects.
Corporate bonds are mostly debt securities, which are issued by corporations and purchased by investors. As compared to government bonds, you can get higher interest rates.
These are just a few information about bonds; if you really want to gain more knowledge and get some benefits from the same then get assistance from a reputed trading platform similar to Arya.
Arifur Rahman:
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