Complete Guide To Corporate Finance


Bonds - The Bond Market

The bond market is where debt securities are issued and traded. The bond market primarily includes government-issued securities and corporate debt securities, and it facilitates the transfer of capital from savers to the issuers or organizations that requires capital for government projects, business expansions and ongoing operations. The bond market is alternatively referred to as the debt, credit or fixed-income market. Although the bond market appears complex, it is really driven by the same risk and return tradeoffs as the stock market. Most trading in the bond market occurs over the counter through organized electronic trading networks and is composed of the primary market (through which debt securities are issued and sold by borrowers to lenders) and the secondary market (through which investors buy and sell previously issued debt securities among themselves). Although the stock market often commands more media attention, the bond market is actually many times bigger and is vital to the ongoing operation of the public and private sectors.

The bond market can essentially be broken down into three main groups: issuers, underwriters and purchasers.

The issuers sell bonds or other debt instruments in the bond market to fund the operations of their organizations. This area of the market is mostly made up of governments, banks and corporations. The biggest of these issuers is the government, which uses the bond market to help fund a country's operations. Banks are also key issuers in the bond market, and they can range from local banks up to supranational banks such as the European Investment Bank. The final major issuer is the corporate bond market, which issues debt to finance corporate operations.

The underwriting segment of the bond market is traditionally made up of investment banks and other financial institutions that help the issuer to sell the bonds in the market. In general, selling debt is not as easy as just taking it to the market. In most cases, millions if not billions of dollars are transacted in one offering. As a result, a lot of work needs to be done to prepare for the offering, such as creating a prospectus and other legal documents. In general, the need for underwriters is greatest for the corporate debt market because there are more risks associated with this type of debt.

The final players in the bond market are those who buy the debt. Buyers basically include every group mentioned as well as any other type of investor, including the individual. Governments play one of the largest roles in the market because they borrow and lend money to other governments and banks. Furthermore, governments often purchase debt from other countries if they have excess reserves of that country's money as a result of trade between countries. For example, Japan is a major holder of U.S. government debt.

Getting bond quotes and general information about a bond issue is considerably more difficult than researching a stock or a mutual fund. There is not a lot of individual investor demand for the information; most bond information is available only through higher level tools that are not accessible to the average investor.

In most cases, if you have a brokerage account, you will have access to that firm's research tools, which may include bond quotes and other information. Your brokerage is therefore the first place that you should look for bond information. However, there are also free tools available online that provide some basic information such as the bond's current price, coupon rate, yield to maturity (YTM), bond rating and other pertinent information. Online services can be limited, however, if they do not give you the volume of bonds that trade hands or a bid-ask spread, making it difficult to measure the true price of the bond.

How Inflation And Interest Rates Affect Bonds
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