Why buy bonds in a no-arbitrage market?
Rates are a complex field. I will assume that context wise you are talking about rates for a individual saver quantities. The two rates you are asking about are personal bank saving account and exchange traded bonds. The points you want to compare between them are. In general, a bond is what we called a fixed rate instrument. This means that for the life of the product, it will yield a fixed percentage of its face value at a regular period. Baring any extreme circumstances (such as bankruptcy), no external factors will change the payment schedule on a bond. Conversely, by placing your money into a bank, you will accrue interest rate at some value related to some published interest rate. For example, if tomorrow, the Treasury decided to try to stimulate the economy, they could slash the interest rate, this would directly affect the rate at which your savings account would accrue interest. In general, a bond has a maturity date, where the capital is finally released from the bond. Until such date, you cannot access the money directly (you can however sell the bond, but it would likely be at a discounted value). Therefore, in general, you cannot get access to the money whenever you want it. As for a saving account, normally one can access the funds instantly, if not within a few days. This seems to the reason people seem to be focusing on. For each bond, the issuer of the bond is obligated to pay you the holder of the bond fixed payments at an interval, plus the capital at the maturity. However, obligation does not mean guarantee. If the issuer, is unable to make the payments, they may go into bankruptcy to avoid paying you. There are companies setup to advise people on the likelihood of each bond issuer on their ability to honour their debts. For example Standard and Poor issues a rating which goes all the way up to AAA for bonds. Recently, many sovereign countries have lost their AAA rating from S&P. Meaning that S&P feel that the possibility of these countries going bankrupt is non-zero. Conversely, banks may also be unable to give you your money when requested. In the US, the reserve requirements means that at any one time it only holds 10% of the money it owes to its customers. This can mean that if every customer turns up to the bank to demand their money, that bank would be unable to pay. This situation is called a Bank Run. During such a situation, the bank would likely collapse and default. In many modern countries, the government put into place guarantees on the first xxx amount in saving accounts, but otherwise, your savings could be lost. There are many complex reasons to choose one instrument over another (including some I have avoided), even if at the outset, they could appear to have the same rates. For safety. If something catastrophic happens to your bank and your money is in there you will lose any not covered by FDIC. So if you have a very large amount of money you will store it in bonds as its much less likely that the US treasury will go bankrupt than your bank. I also literally just posted this in another thread: Certain rules and regulations penalize companies or institutions for holding cash, so they are shifting to bonds and bills. Fidelity, for example, is completely converting its $100 billion dollar cash fund to short term bills. Its estimated that over $2 trillion that is now in cash may be converted to bills, and that will obviously put upward preasure on the price of them. The treasury is trying to issue more short term debt to balance out the demand. read more here: http://www.wsj.com/articles/money-funds-clamor-for-short-term-treasurys-1445300813 "If by ""putting money in the bank"" you mean regular savings or checking, then the bond locks a rate for a period of time, whereas your savings/checking rate can vary over that period.  That variation might go for you or against you.  Depending on your situation, you might prefer to take a determined rate to the variations.  In addition, some bond types provide tax benefits (e.g. treasuries and municipal bonds) that change the effective return - You cannot just compare the interest rates. Finally, the bonds have ""resale"" value on the secondary market like stock - Depending on your outlook and strategy, you might by the bond for its value as a security rather than for the interest specifically just like you'd could buy a dividend-paying stock for its value as a security rather than for the dividend.  In other words, you might think that bond values are going up, so you buy bonds with the intent of making a capital gain rather than counting on the interest returned. (The bond market does depend on the interest rate, so these are not independent factors.) I see the other answer that mentions the potential for your bank busting and you losing money beyond the FDIC insurance limit.  The question doesn't specify U.S. Government bonds though, so I don't think that answer is generally good.  It would be good in the case that you had a lot of money (especially an institution or foreign government) and you were specifically interested in U.S. Treasury bonds.  Not so much if you invest in corporate bonds where you have no government insurance / assurance of any sort.  Municipal bounds are also not backed by the U.S. (federal) government, but they may have some backing at the state level, depending on the state." There is no single 'market interest rate'; there are myriad interest rates that vary by risk profile & term. Corporate bonds are (typically) riskier than bank deposits, and therefore pay a higher effective rate when the market for that bond is in equilibrium than a bank account does. If you are willing to accept a higher risk in order gain a higher return, you might choose bonds over bank deposits. If you want an even higher return and can accept even higher risk, you might turn to stocks over bonds. If you want still higher return and can bear the still higher risk, derivatives may be more appealing than stocks. It is my understanding that banks pay less than the going rate on savings accounts and require that the person who takes out a loan pay more than the going rate. That is how the bank gets its money.  Usually the going rate is affected by the current inflation rate (but that has not been true for the last few weeks). So that means that, typically, the money you have in the bank is, gradually, losing purchasing power as the bank typically pays you less than the inflation rate.  So if you want your money to keep pace with inflation (or do a bit better) then you should buy bonds. Bonds can increase in price, if the demand is high and offer solid yield if the demand is low.  For instance, Russian bond prices a year ago contracted big in price (ie: fell), but were paying 18% and made a solid buy.  Now that the demand has risen, the price is up with the yield for those early investors the same, though newer investors are receiving less yield (about 9ish percent) and paying higher prices.   I've rarely seen banks pay more variable interest than short term treasuries and the same holds true for long term CDs and long term treasuries.  This isn't to say it's impossible, just rare.  Also variable is different than a set term; if you buy a 10 year treasury at 18%, that means you get 18% for 10 years, even if interest rates fall four years later.   Think about the people buying 30 year US treasuries during 1980-1985.  Yowza. So if you have a very large amount of money you will store it in bonds as its much less likely that the US treasury will go bankrupt than your bank. Less likely?  I don't know about your bank, but my bank doesn't owe $19 trillion.
Bonds provide protections against stock market crashes, diversity and returns as the other posters have said but the primary reason to invest in bonds is to receive relatively guaranteed income. By that I mean you receive regular payments as long as the debtor doesn't go bankrupt and stop paying. Even when this happens, bondholders are the first in line to get paid from the sale of the business's assets. This also makes them less risky. Stocks don't guarantee income and shareholders are last in line to get paid. When a stock goes to zero, you lose everything, where as a bondholder will get some face value redemption to the notes issue price and still keep all the previous income payments. In addition, you can use your bond income to buy more shares of stock and increase your gains there. "TL;DR: If your currently held bond's bid yield is smaller than another bonds' ask yield. You can swap your bond for bigger returns. Let's imagine you buy a long bond for $12000 (face value of $10000) and it has 6% coupon. The cash flows will have an internal return rate of 4.37%, this is the published ""ask yield"" in 2014 of the bond. After six years, prices have fallen, inflation and yields went up. So you can sell it for only $10000. If you would do it, the IRR will be only 2.55%, so there will be less return, than if you keep it.  But if you would ""undo"" the transaction, then the future cash flows would yield 6.38%. This is the ""bid yield"" in 2020 of the bond. If you can find an offer that yields more than 6.38%, you have better returns if you sell your bond and invest that $10000 in the other bond.  But as other answers pointed it out, you rarely have this opportunity as the market is very effective. (Assuming everything else is equal.)" stocks represent ownership in a company. their price can go up or down depending on how much profit the company makes (or is expected to make).  stocks owners are sometimes paid money by the company if the company has extra cash.  these payments are called dividends. bonds represent a debt that a company owes.  when you buy a bond, then the company owes that debt to you.  typically, the company will pay a small amount of money on a regular basis to the bond owner, then a large lump some at some point in the future. assuming the company does not file bankrupcy, and you keep the bond until it becomes worthless, then you know exactly how much money you will get from buying a bond. because bonds have a fixed payout (assuming no bankrupcy), they tend to have lower average returns.  on the other hand, while stocks have a higher average return, some stocks never return any money. in the usa, stocks and bonds can be purchased through a brokerage account. examples are etrade, tradeking, or robinhood.com.   before purchasing stocks or bonds, you should probably learn a great deal more about other investment concepts such as: diversification, volatility, interest rates, inflation risk, capital gains taxes, (in the usa: ira's, 401k's, the mortgage interest deduction).  at the very least, you will need to decide if you want to buy stocks inside an ira or in a regular brokerage account. you will also probably want to buy a low-expense ration etf (e.g. an index fund etf) unless you feel confident in some other choice. "I'll answer your question, but first a comment about your intended strategy.  Buying government bonds in a retirement account is probably not a good idea.  Government bonds (generally) are tax advantaged themselves, so they offer a lower interest rate than other types of bonds.  At no tax or reduced tax, many people will accept the lower interest rate because their effective return may be similar or better depending, for example, on their own marginal tax rate.  In a tax-advantaged retirement account, however, you'll be getting the lower interest without any additional benefit because that account itself is already tax-advantaged. (Buying bonds generally may be a good idea or not - I won't comment on that - but choose a different category of bonds.) For the general question about the relationship between the Fed rate and the bond rate, they are positively correlated.  There's not direct causal relationship in the sense that the Fed is not setting the bond rate directly, but other interest bearing investment options are tied to the Fed rate and many of those interest-bearing options compete for the same investor dollars as the bonds that you're reviewing.  That's at a whole market level.  Individual bonds, however, may not be so tightly coupled since the creditworthiness of the issuing entity matters a lot too, so it could be that ""bond rates"" generally are going up but some specific bonds are going down based on something happening with the issuer, just like the stock market might be generally going up even as specific stocks are dropping. Also keep in mind that many bonds trade as securities on a secondary market much like stocks.  So I've talked about the bond rate.  The price of the bonds themselves on the secondary market generally move opposite to the rate.  The reason is that, for example, if you buy a bond at less than face value, you're getting an effective interest rate that's higher because you get the same sized incremental payments of interest but put less money into the investment.  And vice versa." "Were you thinking of an annuity? They guarantee regular payments, usually after retirement. In any case, every investment has counterparty risk. Bonds guarantee payout, but the issuer could always default. This is why Treasury bonds have the lowest yields, the Treasury is the world's most trusted borrower. It's also why ""junk"" bonds have higher yields than investment grade and partially why longer duration bonds have higher yields. As mentioned, there's bank accounts, which gain interest and are insured by FDIC up to $250,000. If the bank folds, they'll be acquired by another and your account balance will simply transfer. Similar to bank accounts are money market funds. These are funds that purchase very short term ""paper"" (basically <90 day bonds). They maintain a share price of $1 and pay interest in the form of additional shares. These have the risk of ""breaking the buck"" where they need to sell assets at a loss to meet investor withdrawal demands and NAV drops below $1.00. Fortunately, that's a super rare occurance, but still definitely possible. Finally, there's one guy I've seen on TV pitching a no risk high yield investment. I can't remember the firm, but I am waiting to see them shut down for running a ponzi scheme." "Consider the futures market. Traders buy and sell gold futures, but very few contracts, relatively speaking, result in delivery. The contracts are sold, and ""Open interest"" dwindles to near zero most months as the final date approaches. The seller buys back his short position, the buyer sells off his longs.  When I own a call, and am 'winning,' say the option that cost me $1 is now worth $2, I'd rather sell that option for even $1.95 than to buy 100 shares of a $148 stock. The punchline is that very few option buyers actually hope to own the stock in the end. Just like the futures, open interest falls as expiration approaches." QE is artificial demand for bonds, but as always when there are more buyers than sellers the price of anything goes up. When QE ends the price of bonds will fall because everyone will know that the biggest buyer in the market is no longer there.  So price of bonds will fall. And therefore the interest rate on new bonds must increase to match the total return available to buyers in the secondary market. Let's say today you buy the bond issued by StateX at 18$. Let's say tommorow morning the TV says that StateX is going towards default (if it happens it won't give you back not even the 18$ you invested). You (and others that bought the same bond like you) will get scared and try to sell the bond, but a potential buyer won't buy it for 18$ anymore they will risk maximum couple of bucks, therefor the price of your bond tomorrow is worth 2$ and not 18 anymore. Bond prices (even zero coupon ones) do fluctuate like shares, but with less turbolence (i.e. on the same period of time, ups and downs are smaller in percentage compared to shares) EDIT: Geo asked in the comment below what happens to the bond the FED rises the interest. It' very similar to what I explained above. Let's say today you buy the bond just issued by US treasury at 50$. Today the FED rewards money at 2%, and the bond you bought promised you a reward of 2% per year for 10 years (even if it's zero coupon, it will give you almost the same reward of one with coupons, the only difference is that it will give you all the money back at once, that is when the bond expires). Let's say tommorow morning the TV says that FED decided to rise the interest rates, and now on it lends money rewarding a wonderful 4% to investors. US treasury will also have to issue bonds at 4%. You can obviously keep your bond until expiration (and unless US goes default you will get back all your money until the last cent), but if you decide to sell your bond, you will find out that people won't be willing to pay 50$ anymore because on the market they can now buy the same type of bond (for the same period of time, 10 years) that give them 4% per year and not a poor 2% like yours. So people will be willing to pay maximum 40$ for your bond or less. "[...] are all bonds priced in such a way so that they all return the same amount (on average), after accounting for risk? In other words, do risk premiums ONLY compensate for the amount investors might lose? No. GE might be able to issue a bond with lower yield than, say, a company from China with no previous records of its presence in the U.S. markets. A bond price not only contains the risk of default, but also encompasses the servicability of the bond by the issuer with a specific stream of income, location of main business, any specific terms and conditions in the prospectus, e.g.callable or not, insurances against default, etc. Else for the same payoff, why would you take a higher risk? The payoff of a higher risk (not only default, but term structure, e.g. 5 years or 10 years, coupon payments) bond is more, to compensate for the extra risk it entails for the bondholder. The yield of a high risk bond will always be higher than a bond with lower risk. If you travel back in time, to 2011-2012, you would see the yields on Greek bonds were in the range of 25-30%, to reflect the high risk of a Greek default. Some hedge funds made a killing by buying Greek bonds during the eurozone crisis. If you go through the Efficient frontier theory, your argument is a counter statement to it. Same with individual bonds, or a portfolio of bonds. You always want to be compensated for the risk you take. The higher the risk, the higher the compensation, and vice versa. When investors buy the bond at this price, they are essentially buying a ""risk free"" bond [...] Logically yes, but no it isn't, and you shouldn't make that assumption." why would anyone buy a long-term bond fund in a market like this one,   where interest rates are practically bottomed out? 1) You are making the assumption that interest rates has bottom out hence there is no further possibility of it  going down further , i mean who expected Lehman Brother to go bankrupt 2) Long term investors who are able to wait for the bad times of the bond market to end and in the mean time dont mind some dividend payment of 2-3% Why does selling a bond drive up the yield? The bond will pay back a fixed amount when it comes due. The yield is a comparison of what you pay for the bond and what will be repaid when it matures (assuming no default). Why does the yield go up if the country is economically unstable? If the country's economy is unstable, that increases the chance that they will default and not pay the full value of the bonds when they mature. People are selling them now at a loss instead of waiting for a default later for a greater loss. So if you think Greece is not going to default as it's highly likely a country would completely default, wouldn't it make sense to hold onto the bonds? Only if you also think that they will pay back the full value at maturity. It's possible that they pay some, but not all. It's also possible that they will default. It's also possible that they will get kicked out of the Euro and start printing Drachmas again, and try to pay the bonds back with those which could devalue the bonds through inflation. The market is made of lots of smart people. If they think there are reasons to worry, there probably are. That doesn't mean they can predict the future, it just means that they are pricing the risk with good information. If you are smarter than the herd, by all means, bet against them and buy the bonds now. It can indeed be lucrative if you are right, and they are wrong. There is another reason why an investor might buy negative yielding bonds: if the investor expects that bond yields will go even further negative, then they are also expecting the price of the bond to go up. They can resell the bond later at a profit. As an example, they may expect an increase in central bank bond purchases to drive yields lower and prices higher. Usually Bonds are used to raised capital when a lender doesn't want to take on sole risk of lending. If you are looking at raising anything below 10m bonds are not a option because the bank will just extend you a line of credit. "In the quoted passage, the bonds are ""risky"" because you CAN lose money. Money markets can be insured by the FDIC, and thus are without risk in many instances.  In general, there are a few categories of risks that affect bonds. These include: The most obvious general risk with long-term bonds versus short-term bonds today is that rates are historically low." Is it possible to move money from NRE to NRO account Yes you can move money from NRE to NRO without any issue. You can't do the other way round. i.e. Move money from NRO to NRE. I would like to move USD earning to NRE Yes you can further move money in NRE to NRO account Yes you can I am planning to give NRO account to HDFC Home loan for EMI processing Yes you can. Depending on your long term plan it may not be a good idea.  For example if you were to sell the house you cannot move the funds into NRE and outside of India without some amount of paperwork.  However if you pay the EMI via NRE account, on the sale of house, you can transfer the funds into NRE account to the extent of the loan paid and the Original downpayment [if made from NRE account]. also I can deposit money from other savings account to NRO; As an NRI, you can't hold ordinary savings account in India. This is violation of norms. Please have any/all savings account in India converted to NRO at the earliest.