Bonds are considered to be a debt instrument and used by governments and corporations to finance projects. These funds are lent to these entities for a specified time period with a fixed coupon attached. People refer to bonds as a fixed income product and put into the asset class with cash and stocks.

Example: The New York Mets and Yankees raised money by issuing bonds to facilitate building their new stadiums. Without the syndication of these bonds it would be very difficult to raise the capital to build such enormous structures.

Categories of bonds
• Corporate bonds
• Municipal bonds
• Treasury bills
• Treasury bonds
• Treasury notes
• Many financial people categorize the last three as (Treasuries)

The entity or issuer that brings the bond to market that shows the interest rate that will be given to the customer known as a coupon. A maturity date is stated to show when the bonds will be returned. The interest that is paid on the bonds is mainly paid every six months.

The two main categories of a bond are its duration and credit quality. These determine the bonds interest rate paid to clients. Maturities differ depending on the type of bond. Government bills and bonds have ranges between 90 days and 30 years while municipal and corporate bonds have a 3 to 10 year range.

Bonds can fluctuate for many reasons. One of them being interest rates if interest rates rise bond prices most of the time will fall.

Corporate bonds are backed by the companies that syndicated the bonds to the public. If the company has weak earnings or bad news that services the bond can drop drastically. Rating companies that many of you already know such as; Standard & Poors, Moody, etc have the responsibility of rating a company. If they decide to downgrade a company from A to B the company's bonds will most likely fall.

Municipal bonds are issued by a city or local government. Municipalities can go bankrupt so buying a bond with A rating or better is very important. Investors that purchase municipal bonds want a steady payment that is paid monthly or quarterly with a small risk of principal loss. Some investments may carry a substantial risk of loss.

Treasury bonds, bills and notes are protected and backed by the U.S. government so unless our country has a political upheaval or goes bankrupts they may be considered “safe”. Depending on the economic environment at the time you purchase government bonds will affect the return you receive.  Trading in futures and options carries a substantial risk of loss. Futures on bonds do not necessarily move or react to fundamentals in the same way as options or as actual bond prices move.

Bonds can be extremely risky! By understanding interest rates and the environment one may be able to understand bonds a little better.  Click here to register for your free report.