Investing Money Markets

How does the bond market work? Do you buy Bonds at a fixed % and ride them out until they are done?

And why does the Bond market effect the stock market so much?

Public Comments

1. Bond rates do not affect the stock market. Bond rates have been pretty poor for a while. They are more to do with the management of a country's economy. US and UK have major involvements in overseas conflicts so they raise cheap money with bonds. At present they're generally considered a poor investment.
2. Ill answer the second question first, because its easier. Bonds are generally considered to have less risk, so as interest rates rise, that makes bonds more attractive, and the assumption is that as money flows into bonds, there is less money available to go into stocks, which causes a market drop. As for the rest, well, you can also buy stocks at either a discount or premium to the Par value (par is the face value of the bond). You can buy it, and hold it until the redemtion period, collecting the interest the whole time. Or as interest rates fluctuate, the premium/discount amount could change, and you could sell the bond if you feel that the value someone is willing to pay over the face value is worth it to sell. Completely up to the individual investor.
3. the bond market works in any number of ways... some people buy a bond that matures in 20 years... take their annual interest and hold it for the full term. Other people buy bonds they think are cheap and sell them when they think they are high. you're mistaking the symptom as the cause. the bond market and the stock market dont affect each other...it just appears so because they trade off of similar news. What does affect the stock market and bond market is peoples expectations of where interest rates will be. This is why lately you've seen the bond market sell off.. rates go higher and it have a negative effect on stocks... people were expecting a greater chance of a rate cut (rate being the rate set by the federal reserve)... now it appears a greater chance of a rate hike and that means existing bonds will be worth less and it will cost more money to borrow money (people pay more interest) and the economy will therefore slow.
4. Download my free book and read the 3 chapters, "The Anatomy of Bonds". The book is in PDF format. Click on my profile and read my info to get the site.