Bond Trading for Private Investors

Bond trading is an area that many investors know little about. Bonds represent an alternative means of investment to the stock market. Here are the basics of how bonds are traded and what they could do for you as an investor.

What Bonds Are

First of all, in order to trade bonds, you will have to have a basic understanding of what they are. When a corporation needs to raise money, it can issue bonds to investors. These bonds are sold in return for a promise to pay investors a certain amount of interest over the life of the bond. Then at the end of the term, an investor can get the amount of his or her initial investment back. 

Why People Trade Bonds

You may be wondering why people get involved in bond trading instead of just buying the bonds from the company that issues them. First of all, buying bonds from a corporation is usually not a simple process. There is usually a limited number, and the firm that is in charge of the initial public offering has several private investors already in mind to buy them. Therefore, the only way that the general public can get their hands on them is to buy them from an investor that already has them. 

The timing of the investment is another common reason that bonds are traded. Bonds often take 20 to 30 years to mature. If you are older, you may not value a small regular payment as much as someone who has many years left to enjoy it. In that case, you may want a lump sum payment. 

How Bonds Are Traded

The majority of bonds are traded on a person-to-person basis. While there is a bond exchange on the New York Stock Exchange, this represents a small portion of the bonds that are available. In order to trade a bond, you usually have to work with a bond broker or some other type of investment firm that works with bonds. This will present you with a way to find other investors that want to buy or sell bonds. 

Valuing Bonds

Valuing bonds is not quite as simple as selling them at face value. In order to properly value a bond, you have to calculate it in relation to the current market. The coupon rate is the interest rate that the bond is designated to pay over its life. By looking at the coupon rate, you will be able to tell whether the interest rate is higher or lower than what the current interest rate in the market is. If the rate is lower than what you could get in the market, the bond value will be lower than the "par value," or face value. If the interest rate is higher than what you can find in the market, people will pay a premium for the bond. Therefore, it can be helpful to get some assistance from a professional when valuing a bond. 

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