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Bond Markets: Analysis & Strategies

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  • 0:02 Bonds: Definition
  • 1:20 Pricing
  • 2:26 Primary and Secondary Markets
  • 3:06 Lesson Summary
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Lesson Transcript
Instructor: Ian Lord

Ian has an MBA and is a real estate investor, former health professions educator, and Air Force veteran.

Bonds may not be the most exciting investment opportunity, but they serve a valuable role in providing stability for an investment portfolio. Let's take a look at what investors need to know about bond purchases and strategy.

Bonds: Definition

Sarah's financial advisor has told her she should consider adding bonds to her investment portfolio. She has a pretty good understanding of current investments in the stocks of different companies but is unfamiliar with bonds. Let's see how her advisor explains what bond markets are as well as how the prices of these investments are determined and reported.

So what is a bond? When Sarah buys a bond she is buying a loan that is made out to a government or company. Bonds are sold with a face value, which states the amount of money that will be paid to the bondholder at the designated maturity date. Some bonds also offer a coupon rate, which means Sarah receives periodic interest payments of a specific amount at designated dates during the life of the bond.

Because bonds are a fundamentally different kind of investment than stocks they can stabilize the effects of dramatic swings in the market on a portfolio. The strategy of using bonds adds stability by making a portion of the portfolio receive a fixed amount of interest for a specific period of time. Another strategy is to buy mutual funds that contain bonds. A mutual fund offers diversification by holding many bonds and can take care of the work of researching and purchasing bonds as well as keeping up with changes in the market.

Pricing

How is a bond priced? The price of bonds is heavily influenced by the relationship between what a bond's interest rate is in the present compared to the interest rates available from other investments. When the bond is first issued it is typically offered at par, or a specific issue price. After that, its market value fluctuates based on market performance and is reported through financial media gathered from the secondary market. Current and historical pricing reports for individual bonds and mutual funds can also be found through the individual brokerages that hold the bonds for investors.

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