Bond Market - Explained
What is a Bond Market?
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Table of ContentsWhat is a Bond Market?How Does a Bond Market Work?Academic Research on Bond Markets
What is a Bond Market?
A bond market is a place where debt securities are traded. This market includes government-issued securities as well as corporate debt securities. It enables the transfer of capital from savers or investors to the issuers who need the capital for projects and other operations. This market is also known as the debt, fixed-income or credit market.
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How Does a Bond Market Work?
The bond market, although appearing as complicated, is driven by the same risk and return tradeoffs like those of the stock market. Most trading is carried out through organized electronic trading networks over the counter. This market is made up of the primary and secondary markets. The bond market is larger than the stocks market and is essential to the operations of the public and private sectors. The bond market has three groups which are the issuers, underwriters, and purchasers. The issuers are the sellers of the debt instruments in this market, and they are made up of governments, banks, and corporations. The government is always the biggest issuer since it uses this market to fund the operations of a country. The next biggest issuers are the banks and finally the corporations. The underwriters in the bond market are the investment banks and other financial institutions which aid the issuers in selling the bonds. The selling of debt is not an easy undertaking since it might involve the transactions of millions or billions of dollars in one offering. This means that a lot of groundwork in preparation of the offering, such as creating a prospectus and other legal documents, needs to be done. Underwriters are required mostly in the corporate debt market since this debt is associated with a lot of risks. The purchasers of the debt are the final players. Each group mentioned previously can be a buyer as well as other individual investors. Governments are the largest purchasers since they use this market to lend money to other governments and banks. They purchase the debt of other countries if they have excess reserves of that country's money due to trade between the two countries. Obtaining general information about a bond issue is usually more difficult when compared to that of a stock. This is because bond information often is available through higher level tools not possessed by the average investor. This reduces the individual investor demand for the info. In some situations when one has a brokerage account, he can use it to access the firm's research tools which may contain the necessary bond information. There are also some free tools which are available online which may provide some essential bond information. The online services are however limited and don't always give one the information required to use when measuring the real price of the bond.