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In Finance, what is a Flat Scale?

A. Leverkuhn
A. Leverkuhn

Not all investors understand the specific use of the term “flat scale” as it relates to bond investing in particular. In general, people use the term to talk about a flat pay scale, such as a salary, that won’t see a lot of change over time. In bond investing, a flat scale is a little different; it represents a comparison between the yields of different bonds.

The main use of a flat scale in bond investing relates to serial bonds. Serial bonds are often issued at the same time, but have different maturity times. A “maturing” of a bond, or other investment, refers to times when the value of the investment will grow and produce yields for the investor.

Businessman with a briefcase
Businessman with a briefcase

In a flat scale, these various bonds show less significant change between short and long yields relative to their maturity dates. This lower contrast has an effect on the overall strategy of the investor when it comes to buying into bonds for eventual maturity and yields. Some view the flat scale as part of “technical analysis” for bonds, where detailed observation helps individuals make sound decisions.

In general, bond investing is seen as a more solid, less risky option than investing directly into the stock market or commodities, where prices are subject to volatility. Bond investing involves a buy-in and set interest rates for a later payoff. Nevertheless, some finance pros are reporting that over-confidence in bonds can have bad results for an investor. Some increased risks of default make bond investing a less safe option, and those who currently put money into bonds should do research on the bond issuers to make sure that the bonds will stay solvent, or be able to pay off debt over the long term. This includes looking at tax revenues against debts for municipalities, where some local governments have been known to actually default on their bonds due to financial difficulties.

Today’s investors have some choices when it comes to making bond investment decisions. Types of bonds referred to as “new issues” can have tax advantages. Other options include bond products called Exchange Traded Funds (ETFs), where groups of bonds are bundled together. Looking at flat scale contrasts for bond ETFs or other products might help to clarify how bond diversification can help investors to be assured of gains.

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