What is a bond?
- Bond is most widely used type of investment in fixed income markets.
- In Bond Investments the investor invests in a company/government in exchange for predetermined (in most cases it's fixed) interest rate(coupon)
- Companies and governments issue bonds to fund their projects/infrastructure (roads/schools etc)
- Bonds investments are much more safer than stocks(but return might be less).
- Bonds rates are opposite to interest rates.
- Bond markets in most countries remain decentralized and lack common exchanges like stock, future and commodity markets.
- A bond’s maturity refers to the specific future date on which the investor’s principal will be repaid. Generally, bond terms range from one year to 30 years. Term ranges are often categorized as follows:
Short-term: maturities of up to 5 years
Medium-term: maturities of 5 - 12 years
Long-term: maturities greater than 12 years
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Factors affecting Bond rates?
Relationship Between Bonds & Interest Rates : Inverse relationship
Inflation Risk
Default Risk (like Bond issuer might not be able to pay full payments in time)
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Different types of Bond Investments?
| Government Bonds | Municipal Bonds | Corporate Bonds |
| Zero-Coupon Bonds | High-yield bond funds | |
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What is Yield?
A bond's yield is the return earned on the bond, based on the price paid and the interest payment received.
Usually, yield is quoted in basis points, or bps. One basis point is equal to one one-hundreth of a percentage point
or 0.01%. For example, 6.00% = 600 bps.
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As of 2009, the size of the worldwide bond market (total debt outstanding) is an estimated $82.2 trillion.
Bond Market
The Asian bond market in aggregate is far smaller than the US
market. However, the US market is also larger than the bond
markets of the major European economies combined;
The Japanese bond market is much larger than the other
markets in the region, even if they are combined;
US Bond Market
There is ~$820 billion average daily trading volume in the U.S. bond market. Trading is between
broker-dealers and large institutions in a decentralized, over-the-counter (OTC) market.
However, a small number of bonds, primarily corporate, are listed on exchanges.
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