My Economy Guide, in this second article of the series of markets for the bond market , government bonds , corporate bonds and bond risks will be presented to you in a clear and simple statement. In our previous article, we talked about Money Market and Bills . We recommend you to learn the markets in detail by reading this article. Now let’s take a closer look at the bond market.
We explained that states and companies issued bonds to meet their cash needs in the short term, thus borrowing and reaching cash. But how can these institutions pursue long-term financing? The answer to this question can be explained as follows. Institutions in need of financing in the long run issue long-term cash by issuing their bonds, and in return for this borrowing, the investor earns by taking the main money and interest that comes from the bond. Thus, mutual benefit is achieved.
Local governments, such as states or states, may issue bonds with a maturity of more than one year. Government bonds, with maturities of ten years, are useful tools to meet the long-term cash needs of governments and governments. Government bonds are highly appreciated by investors because they provide government security and bring more interest.
Companies like states may need money. Companies that want to meet this need can borrow in the bond market. Thus, the cash needs required for capital investments can be met without obtaining any financing from the bank. In bonds, as in bonds, the investor, ie the lender, cannot be the shareholder of the company or institution from which he / she has received the bond. At the same time, bonds work as leverage for companies issuing bonds. The company has a capital of 10,000 pounds and expects a 20% return, ie 2,000 pounds, by issuing bonds, borrowing 100,000 pounds and providing 20% returns, ie 20,000 pounds.
The risk to repay the debt is higher than government bonds. Therefore, the interest rate on corporate bonds is higher.
Bonds have pros and cons. For investors, risks such as inflation risk, interest rate risk, early call, ie the risk of bonds being withdrawn before maturity is possible. Let’s look at the risks in more detail.
- Borrowing institutions or companies may not be able to pay their debts. This constitutes an investment risk for investors.
- If inflation increases during the maturity of a bond, the return of the investor is compensated by inflation.
- If an interest rate increase occurs during the maturity of a bond, the value of the bond decreases until it equals the new high interest rate. In this case, if the bond holders try to dispose of their bonds before they are due, they will lose their main currency.
- If interest rates decrease during the maturity of a bond, bond issuers call the bonds early and issue them again with a low interest rate. Investors who receive bonds with the first interest rate lose interest income as a result of this event.