The Bond Market

A bond is essentially a loan. When you buy a bond you are loaning money to the institution that sold you the bond. The debt or borrowing instruments that make up the bond market are generally longer term than the instruments that make up the money market. The bond market includes corporate bonds, Treasury notes and bonds, municipal bonds, mortgage securities, and federal agency debt. Sometimes the bond market is referred to as the "fixed-income capital market" because its instruments often make payments in a steady stream or the income can be calculated by using a formula. But don't think that bonds are without risk, they have different amounts of risk depending on the probability that the institution will be able to pay back the bond and the volatility of the interest rate.

Bonds differ from stocks in that when you buy a bond you are promised a specific return. The returns often come as a coupon payment, but returns can also be the difference between the discounted price you pay for the bond and the bond's face value. This will be explained in more detail later on.

While bonds don't give as high an average return as stocks, they are very useful to balance your portfolio. Often when stock prices go down, bonds go up.

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