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Bonds can be thought of as loans. Just as we sometimes need to borrow money to make a large purchase, such as a home or car, governments and corporations will sometimes need to borrow money to finance existing expenses, for construction, or for further expansion. Sometimes, the amount of capital required far outreaches the ability of banks to accommodate this need. This is where the bond markets come into play.
In the bond market, participants can issue new debt, which is known as the primary market, or they can sell and buy debt securities, which is known as the secondary market. This is usually as bonds, but it may include bills, notes, and so on.
When a bond is issued, the issuer promises to pay the bondholder interest payments on the amount of the loan for the life of the loan. This is typically done in six-month increments but can be slightly different for a few bond types.
Government treasuries – bonds issued by national governments – are considered among the safest long-term investments.
When an investor purchases a government bond, they are in effect, lending money to the government for a set number of years. In return, they receive interest payments on the amount of the loan. The face value of the bond does not change.
Bonds do not have to be held until they mature. There is a thriving secondary market for government bonds.
There are a number of factors to consider when calculating the likely future value of a government bond, including political stability, the value of its currency, and the risk of inflation.
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