Finanical Management Essay Example | Topics and Well Written Essays - 2000 words

Finanical Management - Essay Example (Investing, 2005) For instance, the US government is the seller of the bonds. When you buy bonds, you become an investor, and they are practically lending money to the US government. The bond bears a promise of the seller to repay the principal amount of the loan at a specified time. When the US Treasury issues a bond, the government guarantees to pay back your principal known as the face value plus interest on maturity. When the investor buys a bond and waits until it matures, he will know exactly how much he is going to receive at the maturity period of the bond. It also called a fixed-income investment as a steady payout is given annually, or semi-annually. For example, you purchase a bond at $1,000 with a fixed rate of 6%, with 4 years of maturity, your income ($60/1000) is $60 which is payable to you every year for 4 years, then you receive the face value of the bond. The coupon rate in bond is fixed and is carried until the maturity of the bond, but the quoted price of the bonds varies because of the interest rates fluctuation. Fluctuations in interest rates values bonds higher or lower than its original value. So when an investor buys a bond and the interest falls, the value of the bond rises, and when the interest rises, the price of the bond falls. Price changes in bonds occur in choices of bonds. Longer term bond prices are more changeable than short term bond prices and more risky. Longer term bonds are more exposed to interest rate risks because the long stream of interest payments to investors does not match the current market interest rates. (AAII) Coupon interest rates vary and changes because it is caused by the fluctuation of rates of interests. Interests in bonds may be fixed, floating or payable at maturity. Interest rates vary because some sellers and buyers of bond want to have an adjustable interest rate which is related to the prevailing market rates. This is called a