Bond Markets

Bond Markets

A bond is a debt security, or basically a loan, that an investor makes to a corporation, a government, an agency, or municipalities. In return for up-front cash, a corporation or government promises to make specific payments to a bondholder on specific dates. The bondholder can not only expect fixed payments but also the principle repayment when the bond reaches its maturity date (The Bond Market, 2002). A bond is considered a fixed-income security because the investor knows the exact amount of cash that will be paid back if the bond is held until maturity.

A bond market is a financial marketplace where investors can purchase and sell various types of bonds or debt securities. It can be categorized into three main groups: issuers, underwriters, and purchasers. Issuers sell bonds or other debt securities in the bond market to finance the operations of their various organizations. The main issuers of the market are governments, banks, and corporations. Underwriters are traditionally made up of investment banks and other financial institutions that help the issuer to sell the bonds in the market. The need for underwriters is the greatest for corporation debt market because there are more risks involved. Purchasers are made up of those who buy the debt being issued in the market. They can include not only every group mentioned but also any other type of investor, including the individual. The largest player in the market is governments because they borrow and lend money to other governments and banks and often purchase debt from other countries. (Who are the key players?, 2007)

There are bonds available today to satisfy almost any investment objective and to suit just about any investor, whether individual or institutional. The bond market is divided into four major segments: treasuries, agencies, municipals, and corporates. Treasury bonds are issued by the U.S. Treasury, have the lowest risk, and are the highest quality. All Treasury bonds are backed by the "full faith and credit" of the U.S. government and are very popular with both individual and institutional investors (Gitman & Joehnk, 2005, p. 429).

Agency bonds are issued by various agencies and organizations of the U.S. government. Although they are most like Treasuries, they are not under the obligation of the U.S. Treasury and can not be considered the same. Municipal bonds are issued by states, cities, counties, and other political subdivisions. The major player in this segment of the bond marker is the individual investor since about 40% of all municipal bonds are directly held by individuals (Gitman & Joehnk, 2005, p. 431).

Corporate bonds make up the major nongovernmental issuers of the bond market and are supported by the assets and profitability of the issuing companies. This segment of the bond market can be divided into four segments: industrial, public utilities, rail and transportation bonds, and financial issues. Besides the four categories described above, there are additional specialty bonds that investors can choose from. These include zero-coupon bonds, mortgage-backed securities, asset-backed securities, and high-yield junk bonds (Gitman & Joehnk, 2005, p. 434).

Bond market transactions are carried out through the primary markets in which new issues of securities are sold to the public and through the secondary markets in which investors can trade previously issued securities among other investors. In the secondary market, investors can make transactions using the various organized securities exchanges, such as NYSE, and the over-the-counter markets, such as NASDAQ. Alternative trading systems