Bonds Market Value

Those looking to invest for their future many times look to bonds. Bonds offer security and minimize the risk involved in placing money in an investment option. Bonds are bought for a price and compound interest until the bond matures. At this time the bond holder can cash the bond for its increased worth. Bonds offer high security and low risk due to the fact that they receive backing from either state, local or federal governments. However bonds offer low interest rates due to the low risk attached.

Bonds have a market value and this can alter over time. When one purchases a bond, in addition to the compounding interest the bond holder will receive interest payments twice per year until the bond is cashed. The amount of interest paid will depend on the type of bond and the interest rate at the time. The type of bond will also determine if the interest payments are exempt from federal income tax.

Bonds can either be issued with a fixed or variable rate of interest. The fixed rate of interest means that the interest paid stays the same until the bond matures despite what is happening in the market at the time. If the bond was purchased at a fixed rate of 6% and interest rates drop to 5% the bond holder still receives the regular payments. This scenario increases the market value of the bond should the holder decide to sell it to another investor. However, if the rates increase to7% then the bond holder looses out because they will still only receive the 6% rate of interest. This will also make the bond more difficult to sell on because the market value of the bond will fall.

Bonds can also be bought on a variable rate of interest. If interest rates are high at the time of purchase then the bond holder is at an advantage because the current rate of interest must be made despite the rate. Again, a high rate of interest will increase the market value of the bond. However, should interest rates be cut then the opposite becomes true. The bond holder is the one at the disadvantage because the seller will only have to pay the lower rate of interest. The bond will also become more difficult to sell on due to the fact that the value will be lowered. However a variable interest rate may still attract some investors due to the fact that the rates could increase again.