Bonds

Bonds are debt instruments and the capital is paid out at the beginning and is guaranteed to be repaid upon maturity.
Bonds normally pay a fixed interest rate.
A bond is a debt instrument that represent cash flows payable over a period of time.
The cash flows they represent are the interest payments on the debt and the loan redemption.
Unlike commercial bank loans, bonds are tradable in a secondary market.


A bond is debt instrument issued by a borrower who is then required to pay interest every year including the final amount at maturity.
Bonds are commonly known as Fixed Income instruments. This goes back to the time when the only type of bonds were those that paid fixed coupons every year.



Bonds are usually considered to be debt securities with a term-to-maturity of more than year.
Debt issued with a maturity of less than 1 year is considered to be money market debt.


Bond Markets

Bonds are actively traded and can either be Exchange Traded or Over The Counter.
There is a very big secondary market so lots of volatility.
Large trades are generally done Over The Counter so there is less visibility in the market.
In London corporate bonds are traded on the London Stock Exchange on a quote driven market (SEAQ ??)using market makers.
In the US corporate bonds are traded Over The Counter.


The bond market in developed countries is large and liquid.
In emerging markets the debt market usually develops before the equity market.


Gray Market

This is an informal market where an issue is quoted during its offering period prior to formal offering
The market in a new bond prior to the formal offering.
This is to assess the level of interest from investors


Electronic Markets

Electronic Communication Networks (ECNs) have been developed
These are online bond markets that are generally used for smaller trades.
Eurex Bonds
Bondscape
TradeWeb
eSpeed
ABS


The rate of interest is called the Coupon because "bearer" bonds have no register of holders. The bond states that the issuer owes the "bearer" whoever that may be. The bond therefore has attachments called "coupons" so that the bearer may detach these as required and claim the interest.


Even when bonds are registered and the interest can be posted in the holders address the market still refers to the "coupon" or "coupon rate"



Underwriting

The common process of issuing bonds is through underwriting.
In underwriting one or more banks form a syndicate and then buy an entire issue of the bonds that they then resold to investors.
Government bonds are typically auctioned.



Quoting Conventions

InstrumentSample QuoteDollar AmountRule
Corporate Bond98.2564$982.564priced to 4 dp
US Treasury Note, US Treasury Bond100:02$1,000,625 (100+ 2/32)left of ":" is percentage right of ":" is 32nd
US Treasury Bill4.73%$952.70 (100 - 4.73)percent discount from par
Mortgage Backed Security98-24+$987.656left of ":" is percentage A plus(+) is a 64th. A 3rd digit would be 256th


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Bond Classifications

US Treasuries
Corporate Bonds
High Yield Bonds
Mortgage Backed Securities
Asset Backed Securities
Agency Bonds
Collateralized Debt Obligations


Risks

Credit Risk 
Interest Rate Risk 
Call RiskThis applies to bonds that have a call feature in their provision.
This is the risk that the market interest rate drops below the coupon rate.
This allows the issuer to refinance the bond
Volatility RiskThis applies to bonds that have embedded provisions ??
Reinvestment RiskThis is the risk associated with the market interest rates affecting the reinvestment of the bond cash flows
Inflation RiskThis is the risk associated with the rate of inflation affecting the value of the cash flows.
Liquidity RiskThis is the risk associated with how easy or quickly the bond could be sold.





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