Pin Me

Bond Basics: What Bond Markets Mean to an Average Investor

written by: Ashwin Satyanarayana•edited by: Jason C. Chavis•updated: 6/23/2010

Bond markets are a veritable backbone for any economy. Without this market, there would not be liquid cash available for companies to grow, the economy to develop and the government to invest in. Read on to find out more about bond markets and what they mean.

  • slide 1 of 1

    Bond Markets

    Bond Markets aren't hot or happening, but they form an incredible backbone to financial markets all over the world, including the United States of America. Bonds, as you would have understood from the previous articles in this series, are nothing but small loans investors lend out to the government, companies, and all others who need the money for various needs. In many discernible ways bonds help raise capital needed to build necessary infrastructure; lay bridges, homes and parks; create jobs; start companies or grow them into larger corporations, etc.

    Apart from the direct effect of the bond market on the economy, bonds also help keep the tax rates low since the government now has this other route to raise money for its various needs and to help it finance public debt.

    Typically, bond markets are the steel-clad, super-strong financial backbones that would spur economic growth for many countries. Bond dealers, banks, the primary bond market and other intermediaries as mentioned in the article titled “Bond Basics: 5 Ways to Buy Bonds"

    Since we talk about large sums of money here and that this money is very important for the economy and the investors (i.e Individuals, Corporates and the Government), the bonds are issued with the help of an Investment Bank which is also known as the Underwriter.

    The bonds are first purchased as issues from all these above mentioned sources, apart from banks and intermediaries from the primary bond market. The capital infused thanks to the bond sales is then used for the various purposes mentioned above. Bonds once purchased can be traded again on the secondary market ( just like we buy and sell stocks) – this makes it easy for investors to invest and disinvest as they please, whenever they deem it necessary.

    In the case of U.S, the market holds at a whopping size of 11 trillion in outstanding debt obligations and is by far the world's largest securities market and is reported even larger than the U.S Stock Market, according to the site investingbonds.com.

    For Individual Investors, this has a lot standing for them. While they are supplying all-important cash for the companies, government and other borrowers, they get a secure income from their investments. Their investments are sound and secure given the size of the market and these bonds are carefully accounted for. All of this, when put together, means a large piece of cheese everyone can nibble on. A firm and solid foundation for an investor's hard earned wealth.