Bonds Are Just REALLY Large Loans
The stock market gets all of the news headlines but the bond market is nearly twice as big and more important to the health of our economy. It is a good sign when the bond market is not in the news. We want it to be boring and functioning smoothly. Disruption in the bond market is what can get the economy in trouble.
Just as individuals get a mortgage to buy a house, or a car loan to buy a vehicle, or use credit cards, corporations use debt to build factories, buy inventory, and finance acquisitions. Governments use debt to build infrastructure and to pay obligations when tax revenues fluctuate. Loans help to keep the economy running efficiently.
Whenever the size of the loan is too large for a bank to handle, companies and governments go to the bond market to finance their debt. The purpose of the bond market is to enable large amounts of money to be borrowed.
The Media Rarely Talks About Bonds -- Stocks Are More Exciting
If you don’t have a job related to finance, there is little opportunity to learn about the bond market, especially since it is rarely in the news. Here are a few things to keep in mind. Like the stock market, the bond market is made up of investors trading with other investors. The original company that received the money and is responsible for paying back the money, is not involved in the day-to-day trading. The market value of bonds can fluctuate daily due to changes in inflation, interest rates, and fickleness of investors. One day investors like the bond, and the next, they like something else more.
But regardless of those day-to-day price changes, when the bond reaches its maturity date, the company who issued the bond is responsible for paying back the original amount to whomever owns the bond at that time. The legal obligation to pay back the amount due on the bond is what gives the bond market its stability.
As individuals, we all have had exposure to loans, from mortgages to credit cards. What can make the bond market confusing versus the loan market that we are familiar with, is that the terms are frequently different.
Comparison of personal loan market versus the bond market
