What are bonds?
Bonds, also known as fixed income securities or debt investments are simply loan agreements between the borrower (issuer) and the lender (bondholder). Like loans, Bonds pay interest periodically and also repay the principal (original loan amount) at maturity. Bonds are normally issued by governments, municipalities and corporations when they require capital to for their activities.
The bond indenture for an issue is the legal document outlining the characteristics of the bond, otherwise the actual terms of the agreement between the lender and the borrower. It is vital that before purchasing a bond that your read the indenture, so that you can correctly estimate the risk of the security.
History of the Bond Markets
The first ever bond to be issued by government was in 1693, by the Bank of England to raise money to fund their war against France. However, the US didn’t begin issuing bonds until World War 1, releasing the Liberty Bond. By the 70’s, the modern bond market had begun to take shape. Investors no longer saw bonds as simply a way to preserve their capital and earn interest but rather as a way to make money, through buying and selling bonds in the secondary market.
Up until the 70s, the bond market was predominately made up of governments and large companies searching for capital. The main investors were institutional in nature, generally consisting of insurance companies and pension funds.
Over recent history, the US bond markets have offered the most liquid market, though Europe has expanded rapidly after the inception of the Euro 1999.
Today’s the global marketplace for bonds, represents $90 trillion in securities. The 2 main sectors of the bond market are still government and corporate debt, though new types of bonds are becoming available such as mortgage-backed securities and collateralized debt obligations.