Bond Market Definition

Cite this article as:"Bond Market Definition," in The Business Professor, updated February 26, 2019, last accessed August 11, 2020,


Bonds Market Defined

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.

A Little More on Bond Market

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.

References for Bond Market

Academic Research on Bond Markets

  • An empirical analysis of stock and bond market liquidity, Chordia, T., Sarkar, A., & Subrahmanyam, A. (2004). The Review of Financial Studies, 18(1), 85-129. This is an article which explores the cross-market liquidity dynamics through the estimation of a vector autoregressive model for liquidity such as the returns, volatility, bid-ask spread and depth and many others.
  • Does auditor quality and tenure matter to investors? Evidence from the bond market, Mansi, S. A., Maxwell, W. F., & Miller, D. P. (2004). Journal of Accounting Research, 42(4), 755-793. This paper examines auditor characteristics relationship with the cost of debt financing. The results indicate that auditor quality and tenure matter to capital market participants.
  • State fiscal institutions and the US municipal bond market, Poterba, J. M., & Rueben, K. (1999). In Fiscal institutions and fiscal performance (pp. 181-208). University of Chicago Press. This presents fresh evidence on the impacts of state fiscal institutions on the yield of state general obligation bonds.
  • Corporate bond market transaction costs and transparency, Edwards, A. K., Harris, L. E., & Piwowar, M. S. (2007). The Journal of Finance, 62(3), 1421-1451.  This paper uses a record of US over the counter secondary trades in corporate bonds, to determine the average transaction costs used as a function of trade size for every bond which traded more than nine times between January 2003 and January 2005.
  • Markets: Transparency and the corporate bond market, Bessembinder, H., & Maxwell, W. (2008). Journal of economic perspectives, 22(2), 217-234. This article describes the trading protocols in the corporate bond market and assesses the effects of increased transparency in the market. It employs the opinions of some finance professionals and the articles in the trade press to get a better view of the effects of transparency on corporate bond markets.
  • Regulatory pressure and fire sales in the corporate bond market, Ellul, A., Jotikasthira, C., & Lundblad, C. T. (2011). Journal of Financial Economics, 101(3), 596-620. This is an investigation of the downgraded corporate bonds’ fire sales encouraged by the regulatory constraints imposed on insurance companies.
  • The informational efficiency of the corporate bond market: An intraday analysis, Hotchkiss, E. S., & Ronen, T. (2002). The Review of Financial Studies, 15(5), 1325-1354. This paper attempts to find out whether the informational efficiency of corporate bond prices is the same as that of underlying stocks by using a unique dataset which is based on daily and hourly high-yield bond transaction prices.
  • What moves the bond market?, Fleming, M. J., & Remolona, E. M. (1997). This article attempts to provide a rational explanation to the sharpest price changes as well as most active trading episodes.
  • Macroeconomic news and bond market volatility1, Jones, C. M., Lamont, O., & Lumsdaine, R. L. (1998). Journal of Financial Economics, 47(3), 315-337. This paper presents an investigation into whether non-autocorrelated announcements cause the rise of auto correlated volatility.
  • Credit market shocks and economic fluctuations: Evidence from corporate bond and stock markets, Gilchrist, S., Yankov, V., & Zakrajšek, E. (2009). Journal of monetary Economics, 56(4), 471-493. This paper examines the evidence on the information content of various corporate credit spreads using a wide array of credit spreads directly developed from the secondary bond prices on outstanding senior unsecured debt that is issued by a large panel of nonfinancial firms.
  • Bond price data and bond market liquidity, Sarig, O., & Warga, A. (1989). Journal of Financial and Quantitative Analysis, 24(3), 367-378. This article characterizes the liquidity-driven noise in the CRSP Government Bond price data which is set by comparison of these price records to the Shearson Lehman Brothers (SLB) Bond Database.

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