Asset class - fixed interest

Secondary market for bonds

The main difference between a term deposit and a bond is that a bond may not need to be held until maturity – it can be sold to another investor prior to the maturity date.

This then creates a secondary market for bonds.

Remember we earlier explained that the interest rate paid on the bond is generally fixed.

On the secondary market, the coupon remains fixed but the value or price of the bond changes to reflect the current market conditions (in particular, the interest rate at the time).

Therefore the bond capital value can increase or decrease. Generally, the market price of a bond will increase if market interest rates fall and vice versa.

This results in the potential to earn interest from a bond as well as growth or decline in the capital value of the bond.