Chapter 6 Bond Markets DEFINITION OF BOND MARKETS: CHAPTER OVERVIEW Equity (stocks) and debt (notes, bonds, and mortgages) instruments with maturities of more than one year trade in capital markets. In the next several chapters, we look at characteristics of the different capital markets, starting in this chapter with bond markets. 1 In Chapter 7, we look at the mortgage markets (e.g., mortgage-backed securities, asset-backed securities), and in Chapter 8, we describe the equity markets. In this Chapter, we look at bond markets. Bonds are long-term debt obligations issued by corporations and government units. Proceeds from a bond issue are used to raise funds to support long-term operations of the issuer (e.g., for capital expenditure projects). In return for the investor's funds, bond issuers promise to pay a specified amount in the future on the maturity of the bond (the face value) plus coupon interest on the borrowed funds (the coupon rate times the face value of the bond). If the terms of the repayment are not met by the bond issuer, the bond holder (investor) has a claim on the assets of the bond issuer. LG 6-1 Bond markets are markets in which bonds are issued and traded. They are used to assist in the transfer of funds from individuals, corporations, and government units with excess funds to corporations and government units in need of long-term debt funding. Bond markets are traditionally classified into three types: (1) Treasury notes and bonds, (2) municipal bonds, and (3) corporate bonds. Figure 6 – 1 shows the distribution of each type outstanding in 1994 and 2010. In this chapter, we look at the characteristics of the various bond securities (including the trading process in bond markets), the participants in the bond markets, and international bond markets and securities.
Figure 6–1 Bond Market Instruments Outstanding, 1994–2010 Source:Federal Reserve Board Web site, “Flow of Funds Accounts,” various issues. 1Although both notes and bonds are issued by agents such as the U.S. government, their characteristics (e.g., coupon rate) other than maturity are generally the same. In this chapter, the term bondwill mean bonds and notes in general, except where we distinguish notes by their special maturity features. For example, U.S. Treasury notes have maturities of over one year and up to 10 years. U.S. Treasury bonds have maturities from over 10 years at the time of issue. BOND MARKET SECURITIES LG 6-2 Government units and corporations are the major bond security issuers. Figure 6–1 shows that the dollar amount of bond securities outstanding by these groups has increased 229 percent, from $6.2 trillion in 1994 to $20.4 trillion in 2010. Much of this increase occurred between 2008 and 2010 during the depths of the financial crisis as bond markets grew by more than $4 trillion. Historically low rates on debt during this period were a major reason for the boom in bond markets. In this section, we look at the bond market securities issued by each of these groups: Treasury notes and bonds, municipal bonds, and corporate bonds.
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- Winter '14