The bond markets

A Bond is a long-term debt commitment secured through an asset or a promise to pay. It is a loan acquired with the intention of either selling or buying. The certificate of the bond can act as evidence of the lender-creditor relationship. A bond market is a financial market where parties usually trade debt securities in the form of bonds.

The global bond market, as of 2006, was estimated to be worth $45 trillion. The US bond market alone contributed around $25.2 trillion of the total amount of debt. Almost all of the daily trading volume in the US bond market happens in a decentralised, over-the-counter (OTC) market. Majority of the trades are between broker-dealers and large institutions such as insurance companies and pensions funds. Broke dealers bid for bonds which investors are willing to sell, and when the investors want to buy the bonds, they offer them from their inventory. It is evident that trading interest is the backbone of any transaction in the conventional system of issuance of bonds. However, some financial system such as the Islamic financial system avoids trading of interest.

In most countries, the bond markets remain decentralised. These markets have insufficient common exchanges such as stock, future and commodity markets. The reason is that the number of the various outstanding securities is significant, therefore the bond issues that are not exactly alike. However, some corporate bonds are centralised. The New York Stock Exchange (NYSE) is the largest centralised bond market. Majority of the NYSE bond volume is in the corporate debt. A Corporate Bond is a bond that is acquired from a corporation. This type of bond entails long term debts with maturity dates of at least a year after their issue date. Most corporate bonds experience low trading volumes.

Other types of bond include government and municipal bonds. A government bond is a bond that is issued by the national government in their currencies. Any bond that is offered by the national government in foreign currency is known as Sovereign bonds. A municipal bond, on the other hand, is issued by a local government, their agencies, cities, school districts, counties, public airports and seaports, or any governmental entity below the state level.

There is a wide variety of securities in the entire bond market. These securities usually have varying quality of credits from different issuers. The size of the coupon and the term of maturity are some of the bond characteristics differences from issuers. However, a change in interest rate is the primary factor associated with varying prices of bonds. Changes in the interest rates affect all bonds in the same way. Therefore, reporting the changes in the interest rates is the best way to describe the direction of the prices of bonds. A clear understanding of the variations of bond interest gives investors an idea of the general movement of the price of all types of bonds.

Various security firms and Investors use bond indexes to track particular segments of the bond market. They maintain these indexes to capture the prices of bonds and yield changes in specific segments. Bond indexes describe the market by looking at its performance over time and compares the return on particular investments. They include more individual securities than the stock market indexes and are more rule-based and broader. This feature allows the various investors to predict the issues that will be eligible for the index. In general, the bond market enables corporations to grow, investors to gain fixed returns with lower risk, governments to effectively finance themselves, and communities to build infrastructure

 

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