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Encyclopedia > Bond market
Financial markets

Bond market
Fixed income
Corporate bond
Government bond
Municipal bond
Bond valuation
Junk Bond
In economics a financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect efficient markets. ... Download high resolution version (480x640, 110 KB)Blockade in front of NYSE. Picture taken in April 2004. ... Fixed income refers to any type of investment that yields a regular (fixed) payment. ... A Corporate bond is a bond issued by a corporation, as the name suggests. ... A government bond is a bond issued by a national government denominated in the countrys own currency. ... In the United States, a municipal bond or muni is a bond issued by a state, city or other local government, or their agencies. ... Bond valuation is the process of determining the fair price of a bond. ... High yield debt (non-investment grade or junk bond) is a business term referring to a corporate debt instrument, usually a bond, that has a higher yield (compared to investment grade debt) because of a high perceived credit risk (default risk). ...

Stock Market
Stock
Preferred stock
Common stock
Stock exchange
The New York Stock Exchange A stock market is a market for the trading of company stock, and derivatives of same; both of these are securities listed on a stock exchange as well as those only traded privately. ... It has been suggested that shareholder be merged into this article or section. ... A preferred stock, also known as a preferred share or simply a preferred, is a share of stock carrying additional rights above and beyond those conferred by common stock. ... Common stock, also referred to as common shares, are, as the name implies, the most usual and commonly held form of stock in a corporation. ...

Foreign Exchange Market
Retail forex
Forex Scam
The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. ... Template:The Retail Forex Market The Retail Forex (Retail Currency Trading or Retail Forex or Retail FX) market is a subset of the much larger Foreign Exchange market. ... A forex scam is any trading scheme used to defraud individual traders by convincing them that they can expect to profit by trading in the foreign exchange market. ...

Derivative market
Credit Derivative
Hybrid security
Options
Futures
Forwards
Swaps
A derivatives market is any market for a derivative security, that is a contract which specifies the right or obligation to receive or deliver future cash flows based on some future event such as the price of an independent security or the performance of an index. ... A credit derivative is a contract (derivative) to transfer the risk of the total return on a credit asset falling below an agreed level, without transfer of the underlying asset. ... Definition A hybrid security, as the name implies, is a security that combines two or more different financial instruments. ... For other uses, see Option An option contract is an agreement in which the buyer (holder) has the right (but not the obligation) to exercise by buying or selling an asset at a set price (strike price) on (European style option) or before (American style option) a future date (the... In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. ... It has been suggested that forward price be merged into this article or section. ... In finance a swap is a derivative, where two counterparties exchange one stream of cash flows against another stream. ...

Other Markets
Commodities market
OTC market
Real estate market
Spot market
Chicago Board of Trade Commodity market Commodity markets are markets where raw or primary products are exchanged. ... Over-the-counter (OTC) trading is to trade financial instruments such as stocks, bonds, or derivatives directly between two parties. ... Real estate is a legal term that encompasses land along with anything permanently affixed to the land, such as buildings. ... Template:The Spot Market The Spot Market or Cash Marketis a commodities or securities market in which goods are sold for cash and delivered immediately. ...

Valuation and Theories
Market Valuation
Financial market efficiency
Central to the world of finance is the practice of valuation, in monetary terms, of the Financial markets, or Finacial market valuation. ... Financial market efficiency is an important topic in the world of Finance. ...


Finance series
Financial market
Financial market participants
Corporate finance
Personal finance
Public finance
Banks and Banking
Financial regulation
Finance studies and addresses the ways in which individuals, businesses, and organizations raise, allocate, and use monetary resources over time, taking into account the risks entailed in their projects. ... In economics a financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect efficient markets. ... There are two basic financial market participant catagories, Investor vs. ... Corporate finance is a specific area of finance dealing with the financial decisions corporations make and the tools as well as analyses used to make these decisions. ... Personal finance is the application of the principles of finance to the monetary decisions of an individual or family unit. ... Public finance (government finance) is the field of economics that deals with budgeting the revenues and expenditures of a public sector entity, usually government. ... Banker redirects here; see wiktionary:banker for more meanings. ... Financial supervision is government supervision of financial institutions by regulators. ...

v d

The bond market, also known as the debit, credit, or fixed income market, is a financial market where participants buy and sell debt securities usually in the form of bonds. The size of the international bond market is an estimated $45 trillion and the size of outstanding U.S. bond market debt is $25.2 trillion. [1] In economics a financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect efficient markets. ... For other uses, see Debt (disambiguation). ... For security (collateral), the legal right given to a creditor by a borrower, see security interest A security is a fungible, negotiable interest representing financial value. ... In finance, a bond is a debt security, in which the issuer owes the holders a debt and is obliged to repay the principal and interest (the coupon) at a later date, termed maturity. ...


Nearly all of the $923 billion Average Daily Trading Volume in the U.S. Bond Market [2] takes place between broker-dealers and large institutions in a decentralized, over-the-counter (OTC) market. However, a small number of bonds, mainly corporate, are listed on exchanges. A broker-dealer is an institution that has registered with the SEC in order to have the ability to buy and sell securities for customers as well as for its own account. ... Over-the-counter (OTC) trading is to trade financial instruments such as stocks, bonds, or derivatives directly between two parties. ... A stock exchange is an organization of which the members are stock brokers. ...


References to the "bond market" usually refer to the government bond market because of its size, liquidity, lack of credit risk and therefore, sensitivity to interest rates. Because of the inverse relationship between bond valuation and interest rates, the bond market is often used to indicate changes in interest rates or the shape of the yield curve. A government bond is a bond issued by a national government denominated in the countrys own currency. ... Credit risk is the risk of loss due to a debtors non-payment of a loan or other line of credit (either the principal or interest (coupon) or both). ... An interest rate is the rental price of money. ... Bond valuation is the process of determining the fair price of a bond. ... The US dollar yield curve as of 9 February 2005. ...

Contents

Market structure

Unlike the stock market, or markets for futures and options, bond markets in most countries remain decentralized and lack common exchanges. This has occurred, in part, because no two bond issues are exactly alike, and the number of different securities outstanding is far larger. In the United States, various banks act as market makers - though they are not obligated to buy or sell and may stop participation at any time. The New York Stock Exchange A stock market is a market for the trading of company stock, and derivatives of same; both of these are securities listed on a stock exchange as well as those only traded privately. ... A futures exchange, is a corporation or organization which provides a marketplace in which to trade derivatives such as futures contracts and options. ... In finance, an option is a contract whereby the contract buyer has a right to exercise a feature of the contract (the option) at future date (the exercise date), and the writer (seller) has the obligation to honour the specified feature of the contract. ... A market maker is a person or a firm which quotes a buy and sell price in a financial instrument or commodity hoping to make a profit on the turn or the bid/offer spread. ...


Types of bond markets

The Bond Market Association classifies the broader bond market into five specific bond markets. The Bond Market Association is the international trade association for the bond market industry. ...

  • Corporate
  • Government & Agency
  • Municipal
  • Mortgage Backed, Asset Backed, and Collateralized Debt Obligation
  • Funding

Bond market participants

Bond market participants are similar to participants in most financial markets and are essentially either buyers (debt issuer) of funds or sellers (institution) of funds and often both. In economics a financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect efficient markets. ...


Participants include:

  • Institutional investors;
  • Governments;
  • Traders; and
  • Individuals

Because of the specificity of individual bond issues, and the lack of liquidity in many smaller issues, the majority of outstanding bonds are held by institutions like pension funds, banks and mutual funds. In the United States, approximately 10% of the market is currently held by private individuals.


Bond market volatility

For market participants who own a bond, collect the coupon and hold it to maturity, market volatility is irrelevant; principal and interest are received according to a pre-determined schedule.


But participants who buy and sell bonds before maturity are exposed to many risks, most importantly changes in interest rates. When interest rates increase (decrease), the value of existing bonds falls (rises), since new issues pay a higher (lower) yield. This is the fundamental concept of bond market volatility: changes in bond prices are inverse to changes in interest rates. Fluctuating interest rates are part of a country's monetary policy and bond market volatility is a response to expected monetary policy and economic changes. Monetary policy is the government or central bank process of managing money supply to achieve specific goals—such as constraining inflation, maintaining an exchange rate, achieving full employment or economic growth. ...


Economist's consensus views of economic indicators versus actual released data contribute to market volatility. A tight consensus is generally reflected in bond prices and there is little price movement in the market after the release of "in-line" data. If the economic release differs from the consensus view the market usually undergoes rapid price movement as participants interpret the data. Uncertainty (as measured by a wide consensus) generally brings more volatility before and after an economic release. Economic releases vary in importance and impact depending on where the economy is in the business cycle. An economic indicator (or business indicator) is a statistic about the economy. ... // [edit] Introduction [edit] Definition If we were to take snapshots of an economy at different points in time, no two photos would look alike. ...


Bond Investments

Individuals can invest in bonds through fixed income mutual funds. While most such funds will diversify, using the Lehman Brothers Aggregate Bond Index (LBAG) as a benchmark, some will specialize in municipal bonds or high-yield bonds. Fixed income refers to any type of investment that yields a regular (fixed) payment. ... The central idea of a mutual fund is to enable investors to pool their money and place it under professional investment management. ... Lehman Brothers Holdings Inc. ... High yield debt (non-investment grade or junk bond) is a business term referring to a corporate debt instrument, usually a bond, that has a higher yield (compared to investment grade debt) because of a high perceived credit risk (default risk). ...


See also

In finance, a bond is a debt security, in which the issuer owes the holders a debt and is obliged to repay the principal and interest (the coupon) at a later date, termed maturity. ... A government bond is a bond issued by a national government denominated in the countrys own currency. ... A Corporate bond is a bond issued by a corporation, as the name suggests. ... Interest rate risk is the risk that the relative value of a security, especially a bond, will worsen due to an interest rate increase. ... The primary market is the financial market for the initial issue and placement of securities. ... The secondary market is the financial market for trading of securities that have already been issued in an initial private or public offering. ...

Notes

  1. ^ Outstanding U.S. Bond Market Debt Bond Market Association. Accessed November 13, 2006.
  2. ^ Avg Daily Trading Volume SIFMA 2005 Average Daily Trading Volume. Accessed February 19, 2007.

External links


  Bond market  
Types of Bonds
Bonds by Issuer: Corporate bond | Government bond| Municipal bond | Sovereign bond
Bonds by Payout: Fixed rate bond | Floating rate note | Zero coupon bond| Inflation-indexed bond | Commercial paper | accrual bond | junk bonds | convertible bond
Bond Related Terms: Fixed income
Bond valuation
Yield to maturity | Bond duration | Bond convexity

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