The bond market is also known as the debt market or credit market is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as a secondary market. This is usually in the form of bonds, but it may include notes, bills, and so on public and private expenditures. Because of its scale and liquidity, the government bond market is a key part of the bond market, and it is almost always used to compare other bonds to determine credit risk. The primary way of a bond to default is to not pay on time or to not pay in full.
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The borrower is the bond issuer, and the lender is the bondholder or purchaser. At the maturity of the bond, the bond issuer repays the bondholder the principal value. The issuers sell the bond or other debt instrument in the bond market to fund the operations of their organization. These areas of the market are mostly made up of Govt., banks, and corporations. The biggest of these issuers is a government that uses the bond market to fund a country’s operation, such as social programs and other necessary expenses. The US government segment also includes some of its agencies that issue mortgage-backed securities, such as Fannie Mae. Banks are also major bond issuers, ranging from small banks to supranational institutions like the European Investment Fund, which issues debt in the bond market. The corporate bond market, which issues debt to fund business activities, is the final significant issuer in the bond market.
Various types of Bond Issuers:
There are many types of Bond issuers:
- Firms: The most common type of bonds are issued by the firms. Firms issue bonds when they require funds to finance the project or working capital. Firm bonds can range between the whole spectrum of bond ratings, as provided by the S&P rating board.
- Governments: The second most common type of bonds is issued by the governments. The U.S. Treasury bond is an excellent example of this form of bond issuer. Government bond ratings are usually very high, even though it may rely on the particular bond issuing government. A bond issued by a developing countries government will naturally be riskier and lower-rated than a bond issued by a developed country.
- Supranational Entities- supranational entities refer to global entities that are not based in a specific nation. More specifically, a supernational entity has members that exist in multiple countries. Example of supernational entities that issue bond are the world bank of the European investment banks.
This is various types of bond issuers there are other issuers as well such as Regions and municipalities and special project vehicles SPV’s
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Issuing bond is one way for companies to raise money. The investor agrees to give the corporation a certain amount of money for a specific period. In exchange, the investor receives periodic interest payments.
Author – Hariharan Krishnan
About the Author – Hariharan Krishnan is currently in second year BAF and is also doing FRM part 1. He is passionate about financial markets and loves to play chess and outdoor games.