Bond market facts for kids

The bond market is like a big online marketplace where people and organizations can lend and borrow money. When you lend money, you get a special promise called a bond. This bond is like an "I owe you" note that says the borrower will pay you back your money, plus a little extra interest, over a set time. It's also known as the debt market or credit market. In 2006, the total value of bonds traded around the world was about $45 trillion. In the United States, the value of outstanding bonds was $25.2 trillion.

What is a Bond?

A bond is basically a loan that you can buy or sell. When you buy a bond, you are lending money to a government, a city, or a company. In return, they promise to pay you back your original money (called the "principal") on a specific date in the future. They also promise to pay you regular interest payments along the way.

Why Do Governments and Companies Issue Bonds?

Governments and companies issue bonds when they need to raise money for big projects. For example, a city might issue bonds to build a new school or a bridge. A company might issue bonds to expand its business or buy new equipment. Instead of asking for a loan from just one bank, they can get money from many different people and organizations by selling bonds.

How Do Bonds Work?

When you buy a bond, you become a lender. The organization that sold the bond is the borrower.

• Face Value: This is the amount of money you lend, and it's what you get back at the end.
• Coupon Rate: This is the interest rate the borrower pays you. It's usually paid regularly, like every six months.
• Maturity Date: This is the date when the borrower pays you back your original money.

For example, if you buy a $1,000 bond with a 5% coupon rate and a 10-year maturity, you lend $1,000. You'll get $50 in interest each year (5% of $1,000). After 10 years, you'll get your $1,000 back.

Who Buys and Sells Bonds?

Many different types of people and groups buy and sell bonds.

• Individuals: Regular people can buy bonds, often through investment funds.
• Banks: Banks buy bonds as investments and to manage their money.
• Pension Funds: These funds manage money for people's retirement. They often buy bonds because they are generally safer investments.
• Insurance Companies: They invest in bonds to make sure they have enough money to pay out claims.
• Governments: Even governments buy bonds from other governments.

Why Are Bonds Important?

Bonds are a very important part of the financial world.

• Funding Projects: They help governments and companies get the money they need for important projects.
• Investment Options: They give people and organizations a way to invest their money. Bonds are often seen as less risky than stocks, especially for long-term savings.
• Economic Stability: The bond market helps keep the economy stable by allowing money to flow between those who have it and those who need it.

Types of Bonds

There are many different kinds of bonds, depending on who issues them.

• Government Bonds: These are issued by national governments. In the U.S., they are called Treasury bonds. They are usually considered very safe because governments are unlikely to default on their debt.
• Municipal Bonds: These are issued by states, cities, or counties. They are used to fund local projects like schools, roads, or hospitals. Sometimes, the interest you earn on these bonds is not taxed.
• Corporate Bonds: These are issued by companies. The risk of these bonds depends on how strong and stable the company is. Stronger companies usually offer lower interest rates, while riskier companies might offer higher rates to attract investors.

Images for kids

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  Bond market prices.

See also

In Spanish: Mercado de bonos para niños