Chapter08 - Chapter 8 Bond Markets Bond Markets • Part of...

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Unformatted text preview: Chapter 8 Bond Markets Bond Markets • Part of Capital Markets brings LT (over 1 year) Part of Capital Markets brings LT (over 1 year) borrowers and investors together borrowers and investors together • Majors issuers (borrowers) in capital Markets Majors issuers (borrowers) in capital Markets • Households – mortgages Households – mortgages • Business – bonds, stock Business – bonds, stock • Governments – federal, state and local bonds Governments – federal, state and local bonds • Major Investors Major Investors • Households – both directly and indirectly Households – both directly and indirectly • Foreign Investors Foreign Investors 1. 1. U.S. Treasury + Agency Securities U.S. Treasury + Agency Securities , , • Coupon Issues Coupon Issues • Notes – one to 10 year maturity Notes – one to 10 year maturity • Bonds – over 10 year maturity Bonds – over 10 year maturity • Sold at auction by the Federal Reserve Sold at auction by the Federal Reserve • Trend towards shorter term financing; 30 year Trend towards shorter term financing; 30 year bond – discontinued from 2001 to Feb.2006 bond – discontinued from 2001 to Feb.2006 U.S. Government Issues – Notes +Bonds • INFLATION – INDEXED NOTES and BONDS (TIPS) principal adjusted for inflation U.S. Government Issues – Notes +Bonds Consumer Price Index Fixed coupon rate determined at auction Designed to provide investors protection against inflation Allows for calculation of Δ Ρ e from Fisher equation Δ Ρ e = i – r Yield on Treasury Yield on TIPS • SEPARATE TRADING OF REGISTERED INTEREST AND PRINCIPAL (STRIPS) ۰ Treasury security separated into component parts- each interest payment and final principal payment becomes a zero coupon bond ۰ Created by gov’t securities dealers ۰ Often stripped security is more valuable in pieces than...
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This note was uploaded on 03/24/2011 for the course FINA 409 taught by Professor John during the Spring '11 term at Ohio State.

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Chapter08 - Chapter 8 Bond Markets Bond Markets • Part of...

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