The bond market can be defined as the financial market where participants can issue new debt, known as the primary market or buy and sell debt securities known as the secondary market. It may include notes, bills but usually, it is in the form of bonds. The goal of the bond market is to provide long-term financial aid and also funding for both public and private projects and expenditures.
What is a bond market?
The bond market can also be called as a debt market (or) credit market in which the participants are provided with the issuance and trading of debt securities. This market primarily includes government-issued securities and corporate debt securities, facilitating the transfer of capital from savers to the insurers or organizations requiring capital for government projects, business expansions, and ongoing operations.
Types of bond market:
In general bond market can be divided into six categories:
1. Corporate Bond:
The corporate bonds are provided by the corporations for different reasons, such as financing ongoing operations or expanding businesses. It is generally used for longer-term debt instruments which provide a maturity of at least one year. [For Corporate Bonds investment Certified Financial Planner Advice Visit Here]
2. Government or agency bond:
This bond is provided by national governments which entice buyers by providing the face value on the agreed maturity date with periodic interest payments. As a result, it makes the government bond attractive for conservative investors. [For Government or agency bond Certified Financial Planner Advice Visit Here]
3. Municipal Bond:
This kind of bond is provided by the local governments and their agencies, states, cities, special purpose districts, public utility districts, school districts, publicly owned airports and seaports, and the other government-owned entities. [For Municipal Bonds investment Certified Financial Planner Advice Visit Here]
4. Mortgage Bond:
Pooled mortgages on real estate properties provide mortgage bonds. Generally, mortgage bonds are locked in by the pledge of particular assets. The interest is paid on monthly, quarterly or semi-annually. [For Mortgage Bonds investment Certified Financial Planner Advice Visit Here]
5. Asset-backed bond:
This kind of bonds is backed by financial assets. Usually, these assets consist of receivables other than mortgage loans, such as credit card receivables, auto loans, manufactured – housing contracts and home – equity loans. [For Asset-backed Bonds investment Certified Financial Planner Advice Visit Here]
6. Collateralized Debt Obligation:
This is a structured financial product which pools together cash flow- generating assets and repackages this asset pool into discrete tranches which can be sold to investors. [For Collateralize Debt Obligation Bonds investment Certified Financial Planner Advice Visit Here]
Who are the participants?
- Institutional investors
Bonds generally trade in Rs.1,000 increments and are priced as a percentage of par value (100%). Most of the bonds have minimums imposed by the bond or dealer. Typical sizes offered are increments of Rs.10,000. And for broker/dealers, anything smaller than a Rs.100,000 trade is viewed as an “odd lot”.
Bonds pay interest at set intervals. Most bonds have the predictable income, in contrast to dividend income which receives favorable taxation rates. Some investment companies allow individual investors the ability to participate in the bond markets through bond funds, closed-end funds, and unit investment trusts. Exchange – traded funds are another alternative to trading or investing directly in a bond issue. Such securities allow individual investors the ability to overcome large initial and incremental trading sizes.
What is Bond Market Index?
A bond index or bond market index is a method of measuring the value of a section of the bond market. It is computed from the prices of selected bonds. Basically, it is a tool used by investors and financial managers to describe the market and to compare the return on specific investments.
Foreigners are buying Indian bonds?
Overseas investors are keen to buy Indian bonds after the Central bank granted them greater access. India’s high yields and relatively stable currency have spurred Mitsubishi UFJ Kokusai Asset Management to buy more rupee securities, said Tatsuya Higuchi, executive chief fund manager of the fixed-income investment division in Tokyo. Standard Chartered Plc. is long on the nation’s 10-year paper due to “cheap valuations,” Arup Ghosh, senior Asia rates strategist said.
The overseas investors are even keen on buying bonds during most of a seven month rout through February, although they have been restricted by a foreign investor cap of around 5 percent of outstanding notes.
Government’s role to lift –off Indian bond market:
After the government permitted the Employee Provident Fund Organization (EPFO) to invest in double a rated bonds, in these three years hardly any funds have flown into them.
Finance Minister Arun Jaitley’s decision to permit regulated institutions to take a leap towards investment in lower – rated papers for better returns and also to deepen the bond market has raised hope for many.
“If large corporate are mandated to meet their one-fourth funding requirement through the bond market, it will improve the supply of bonds as more companies will tap the debt market,” says Pawan Agarwal, senior director and chief analytical officer at Crisil. The move should provide insurance companies, provident and pension funds an opportunity to invest in high yielding instruments also opening up a new funding source for lower-rated companies.
“As of today, even the provision to invest in up to AA-rated instruments is hardly explored by most of the larger investors,” says Amit Tripathi, head-fixed income, Reliance Mutual Fund. “We need to put in place a robust credit research infrastructure to take advantage of these opportunities.”