Us Bond Market

You have been asked to write a training document about the US Bond Market for use in the new employee-training program. In your document, you must make sure to address each of the following:

1a: The key players in the market; and the types of investments available to both individual investors and institutional investors,

Bond Characteristics

A bond is a "security" which gives the holder a financial claim on the issuer. This claim protects the holder in circumstances in which the issuer is unable to pay the amount due. It is made formal by the "trust indenture", a legal document, which specifies all of the bond's features and the legal rights and obligations of all the parties to the agreement (http://www.finpipe.com/bndchar.htm).

The bond market and bonds investments offer investor's (both individual and corporate) dependable income, relative safety and portfolio diversification. Because bonds typically have a predictable stream of payments and repayment of principal, many people invest in them to preserve and grow capital or to receive consistent interest income (http://www.globaldirectsvcs.com/Bond_Trading.html).

Key Players

Specifically, a bond (a fixed interest financial asset) is issued by governments, companies, banks, public utilities and other large entities and traded/bought by investors (individuals and/or corporations) http://economics.about.com/cs/economicsglossary/g/bond.htm. Thus, these are the key players, both the issuers and the buyers alike.

Types of Bonds and how they are transacted:

Bonds have many characteristics such as the way they pay their interest, the market they are issued in, the currency they are payable in, protective features and their legal status. Bond issuers may be governments, corporations, special purpose trusts or even non-profit organizations. Usually it is the type of issuer or the particular nature of a bond that sets it apart in its own category. For further discussion on the main types of bonds, click on the links below:

Asset-Backed Securities

Convertible Bonds

Corporate Bonds

Eurobonds

Extendible/Retractable Bonds

Foreign Currency Bonds

Government Bonds

High Yield or "Junk" Bonds

Inflation-Linked Bonds

U.S. Treasury Inflation-Protected Securities (TIPS)

Mortgage-Backed Securities

Zero Coupon or "Strip" Bonds

1b. The way transactions are carried out,

The above links address some of these issues. In other words, the bond market is a market in which the bonds of corporations and governments are traded (i.e., banks, etc.) and transacted in various settings (i.e., banks, private sectors, government agencies) and in various ways (i.e, over the counter, electronically, telephone, etc.) www.econ100.com/eu5e/open/glossary.html.

In fact, bond investments are carried out in several ways, depending on the type of bond:

The bond market is any place where newly issued and existing bonds are bought and sold, usually before maturity, by investors looking for income. This market can be a physical trading area (banks, public sector, etc.), but more often the bonds are traded electronically by investors using computers and telephone communications

www.state.il.us/treas/Education/Glossary.htm. In general, in the bond market, however, trades bonds are also issued by corporation and government.

* Companies can borrow money either through the public debt market or through private placements.

A "public" bond issue is approved by a securities agency, which ensures disclosure through a "prospectus" or "information circular". It is important to note that disclosure does not mean investment suitability. A highly speculative bond issue is allowed, as long as the speculative nature is adequately disclosed. A "private placement" is something directly negotiated between the issuer and a lender or group of lenders and is restricted in trading under securities law. This means that only "sophisticated investors" may purchase or trade in these securities. This usually means some minimum investment restriction, for example in Ontario a minimum purchase amount of $150,000.

* Types of Fixed Income Securities can be transacted as well

Most things called bonds aren't really bonds at all. Bonds encompass the wide sweep of fixed income securities. What distinguishes between bonds in a legal sense is the collateral (assets backing up the loan) pledged and the legal rights to this collateral. Most bonds have no specific security attached to them and really should be called "unsecured debentures". This means that in a default situation, the bond-holders rank equally with the other unsecured creditors of the company. Since governments do not pledge specific security, most government bonds are actually debentures. An unsecured debenture usually has a "negative pledge" which prevents the issuer from having assets secured ahead of that issue. Any bond issues, which have senior issues ahead are "subordinate" (this may be relevant for the last question as well).

A "secured debenture" has some particular asset attached to it; say a factory, building or shopping centre. If this involves real estate collateral, these bonds are known as "mortgage bonds". A mortgage bond is different than a mortgage, which is a legal document registered against a particular real estate asset. A mortgage bond is a bond with a trust indenture, which "secures" its collateral by way of a mortgage. A "first mortgage bond" has the first mortgage and senior claim on an asset or group of assets.

Bond Covenants

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