bonds---IOUs or certificates of debt outlining the terms of
a loan which an investor offers in return for regular interest payments
and the eventual return of the original amount loaned (principal) by a specified date
of maturity. The investor can then resell the IOU on the bond market or collect the
interest and eventually get back the principal. Risk of not being able to collect the
interest payments and/or principal amount loaned will serve to decrease the
selling value of the bond and investors will demand a higher rate of interest
from a risky borrower. Longer term bonds are generally considered riskier and investors
will therefore demand higher rates of interest to park money for a longer time interval.
Generally, there is an inverse relationship between
the prices of bonds on the market and the interest rate paid.
Bonds that are“rated” very risky (junk bonds) are generally less
expensive to buy and the interest rate paid on them will usually be higher in
comparison to other less risky investments. Municipal (state and/or local
government) bond interest is at present not federally taxed. US Treasuries are
generally considered risk-free and a surge in their purchase may indicate a
global flight to safety. Treasuries are bought by the Federal Reserve Open
Market Committee (FOMC) in a process called quantitative easing.
a loan which an investor offers in return for regular interest payments
and the eventual return of the original amount loaned (principal) by a specified date
of maturity. The investor can then resell the IOU on the bond market or collect the
interest and eventually get back the principal. Risk of not being able to collect the
interest payments and/or principal amount loaned will serve to decrease the
selling value of the bond and investors will demand a higher rate of interest
from a risky borrower. Longer term bonds are generally considered riskier and investors
will therefore demand higher rates of interest to park money for a longer time interval.
Generally, there is an inverse relationship between
the prices of bonds on the market and the interest rate paid.
Bonds that are“rated” very risky (junk bonds) are generally less
expensive to buy and the interest rate paid on them will usually be higher in
comparison to other less risky investments. Municipal (state and/or local
government) bond interest is at present not federally taxed. US Treasuries are
generally considered risk-free and a surge in their purchase may indicate a
global flight to safety. Treasuries are bought by the Federal Reserve Open
Market Committee (FOMC) in a process called quantitative easing.