Since 1961, however, banks have issued negotiable CDs. They now are traded actively in a secondary money market.
Corporations can raise funds by issuing stock or selling bonds. Business equities are shares of ownership, such as stock that corporations issue. Owners of equities are residual claimants on the income and the net worth of a corporation. The equity holders of a company are paid after all the debts of a company is paid. The significant characteristic of equities is the variation of returns with the profitability of the company. An investor can become the owner of a corporation by purchasing the equity. The edge of bonds on equity is that if the company goes bankrupt the bond holder will be paid before shareholder on the other hand the profitability of the company doesn't benefit much to the bond holder as a bond holder will only get principal plus interest. Hence the ownership of bonds involves low risk as compare to the ownership of stocks, but this comes at the cost of a lower return.
Corporate bonds: Corporations can raise funds by issuing corporate bonds. A Corporate Bond is a long term instrument yielding interest twice each year until the date of maturity. Convertible bonds can be converted into equity shares before the maturity. The corporations offer the convertibility feature with the bonds in order to attract investors. Another feature which increases the attractiveness of bonds is their degree of liquidity which they provide the investors as compare to the equities. The higher liquidity of bonds is due to their trading in the secondary markets. In order to encourage the secondary market trading the Corporations must maintain higher credit ratings.
Reasons for investment in Bonds:
Bonds reduce the short term volatility of the stock market. The perception that the stocks yield higher returns as compare to bonds is true for the period of 10 years or more. Bonds are suitable for the investors who cannot bear the volatile nature of the stock markets. Bonds are suitable for the investors who don't want to put their principal amount at stake. Fixed income securities are also suitable option for the investors who need the income for a specific purpose in the relatively near future. The above mentioned generalizations don't represent all the investors. The investors should maintain diversified portfolio according to their requirements. It is also recommended that the combination of asset classes keep on changing.
US Treasury Notes and Bonds:
US treasury issues long-term debt instruments. The Treasury notes have the maturity ranging from 1 to 10 years. The bonds issued by the treasury have the maturity of more than 10 years. These instruments are traded in the secondary markets due to the low risk involved. They are considered as the most liquid instruments in the capital market.
The securities issued by the state or local Government on long term basis are known as Municipal bonds. The interest payments paid at these bonds are free of federal income tax that's why the interest paid at these bonds are less than the interest paid on corporate bonds.
Characteristics of bonds:
The trading of bonds can be undertaken both at the organized exchanges and over-the-counter markets. The trading procedure followed at the organized exchanges and over the counter markets is same although the significance of