Bond

Bonds or Debt securities are generally entitled to the holder to a fixed rate of interest during their life and repayment of the amount of the bond at maturity. Bonds are generally issued by the governments, financial institutions and companies. Normally, the Issuers undertake to pay investors a fixed rate of interest for a fixed number of years. The fact that the interest rates are fixed makes the bond market attractive because their return is predictable. Bonds are traded in Open Markets in the same way as shares. Bonds are generally issued for a fixed term (the maturity) longer than ten years. U.S Treasury securities issue debt with life of ten years or more, which is a bond. New debt between one year and ten years is a Note. And new debt less than a year is a bill.

Though the terminology is different, a Bond is simply a Loan but in the form of a security. The Borrower is equivalent to the Issuer and the Lender is equivalent to the Bond Holder.

Bond Market

The bond market is a financial market where participants buy and sell debt securities usually in form of bonds. The size of the international bond market is an estimated $45 trillion of which the size of outstanding U.S bond market debt is $25.2 trillion. The "bond market" usually refers to the government bond market because of its size, liquidity, lack of credit risk and therefore, sensitivity to interest rates. Because of the inverse relationship between bond valuation and interest rates, the bond market is often used to indicate changes in interest rates or the shape of the yield curve. A government bond is a bond issued by a national government denominated in the country’s own currency. Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds. Government Bonds are usually referred to as Risk-Free Bonds because the government can raise taxes or simply print more money to redeem the bond at maturity.

But sometimes, bonds play in a very different role.

For ex: During the bear market of March 2000 to October 2002 the Nasdaq stocks took their biggest plunge since the Great Depression. The NASDAQ lost nearly three-quarters of its value. But bonds saved the day for many investors, turning in good-digit returns each year and smoothing out holders' investment performance.

The Question is as to why investing in bonds isn’t paying off?

Yields in the U.S bonds are hovering near 40-year lows. 10-year & 30-year U.S government bonds are currently yielding less than 5%. Earlier the U.S 10yr Treasury note used to gain 8% plus average but from past five years, the average gain has been only 4.4%.

It is said that Americans life is also concerned with the Bonds. The fact is that to add to the problem, Americans are living longer than ever. The average life expectancy in the U.S. has increased. So their living up probability is increasing. That means investments have to pull double duty. Thus the pay off is less while investing in bonds.

The Yield before 2002 was fantastic but after 2002, the Yield of bonds has decreased slightly and slightly and now the average yield of a bond is only 4%. The factors are several. Some of them are the housing data, unemployment, retail sales, share market fluctuations and war situations. Amidst all this, one can anticipate probable returns from the bonds.

Present Scenario:

European government bonds are advancing on a day by day basis in London. The yield on the 10-year bond fell 3 basis points to 4.62 percent in London. The price of the 4.25 percent bond gained 0.24, or 2.4 Euros per 1,000-euro. Bond yields move inversely to prices.

I think that Government bonds are always safe to invest and there is predictable return of money in anyways.