The Short Term Bond Market

The short term bond market is one of the most popular investment markets in the world. Bonds have been around for many years and you can use them for a number of different investment objectives. With short term bonds, you are dealing with an investment that does not span many years as you would with a long term bond. Typically a bond that goes for one to ten years is considered a short term bond. If you are looking for a good way to invest extra cash, the short term bond market might be where you want to look. Here are a few things that you need to know about the market and how it works.

How Bonds Work

A bond is a debt instrument that is used to raise cash for a specific purpose. Bonds are issued by corporations and the United States Treasury. When you buy a bond from a particular entity, you are basically loaning them a given amount of money over a certain term. For example, a common amount for a corporate bond is $1000. You give the company $1000 of your money for them to use as they see fit. They give you a bond certificate and then they make regular interest payments to you over the life of the bond. At the end of the bond term, you give them the bond certificate back and they give you the amount that you loaned them back. This creates a regular flow of interest payments for you as an investor. 

The par value of the bond is the price that it was originally purchased for. The coupon rate of the bond is the amount of interest that the company pays to the bondholder. The secondary bond market allows you to sell your bonds to other investors. They will calculate the value of the bond based on the current interest rate in the market and what the coupon rate of the bond is. Therefore, they may be willing to pay you a premium for the bond which means that they are paying more than the par value. They may also calculate that the bond is worth less than the par value depending on the interest rate. 

Lessens Risk

Investing in short term bonds is a great way to lessen risk in your portfolio. When you buy stocks or other securities, your returns will fluctuate with the market. Therefore, you might make or lose money that you invest. With bonds, this is not typically the case. You know exactly how much money you are going to make over the life of the bond and you can then cash it in for the value at the maturity date. This allows you to plan with some certainty towards the future. 

The main risk that you have with bonds is that the company that you buy them from goes bankrupt. However, even in that case, you are at the front of the line for repayment as you are a creditor. This allows bonds to be one of the safest investments around. 

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