The bond market is composed of securities that are essentially loans from investors to borrowers. Borrowers who can issue bonds are governments, states, organizations or companies. Investors, private individuals, banks, insurance companies and pension funds are all able to purchase bonds.
The coupon, is how the owner of the bond gets paid. The coupon is a rate of interest that is paid to the lender across a fixed amount of time. Bonds are also known as fixed income securities mainly because the interest rate offered is fixed and known to interested parties when the bond is up for sale.
Why trade bonds? Bonds have one very distinct advantage over the stock or the forex trading market. When you buy a bond you are investing in debt rather than equity (stocks). Should tragedy ever befall the bond issuer, say a bankruptcy, creditors (debtholders) get paid before shareholders do.
Bonds are usually a more secure investment than stocks, futures, forex and commodities will ever be. That is not to say there are no high risk bonds on the market. There are. But there are usually numerous conservative bonds available for purchase. They pay-off is usually a lot less than other more exciting investments but that is the trade-off for a good measure of security.
As such, bonds are often an overlooked investment as most people opt for higher risk investments such as forex trading, stocks and commodities. America is the largest issuer of bonds with slightly more than 40% of the international bond market while Japan comes in second. Some 80 trillian US Dollars in bonds we realized in 2008 making the bond market far smaller than either the forex market or the stock exchange market.
There are some disadvantages when it comes to bonds however. For one, you often need large sums of money to make a decent profit since the interest rates are so low.
Secondly, it may not be easy selling your bond should you intend to give it up. Forex orders on the other hand can be sold immediately.
Lastly, you cannot trade bonds like you would forex online. Overall, bonds offer a solid investment opportunity to the Malaysian public and should be part of your investment portfolio.
For those of you in Malaysia that are looking to invest your hard earn money but are unwilling to accept the high risks of most forms of investment, the bond market is perfect for you. Just don't expect pay-outs like you would get in the stock market.
