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Debt Market

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DEBT MARKET

 Debt Market:
The debt market is a marketplace for trading of debt securities. Investors buy debt securities issued by
companies and governments. The issuers sell securities to raise capital and use it to fund business
operations, infrastructure development, and other purpose. The debt market facilitates the sale and
purchase of government bonds, corporate bonds, treasury bills, and notes.

 Types of Debt Market:


Primary market: It is the marketplace for creating, issuing, and trading new securities. Governments and
corporations initiate debt financing to raise capital for funding business
operations and infrastructure development.
Secondary Market: It is the marketplace in which existing or second hand instruments are traded. Here,
investors trade securities among themselves and all bonds are traded over the counter in secondary market.

 The issuer of Bond:


There are three primary categories of bond issuer in the market-
1. Treasury Bonds, are issued by government. They are relatively secured and has less default risk. The
maturity of Treasury bonds may be more than 10 years.
2. Corporate Bonds, are issued by corporations. Companies issue bonds in alternative for bank loan for
debt financing because bond markets offer more favorable terms and lower interest rate.
3. Municipal Bonds, are issued by states and municipalities. The interest earned on most of the municipal
bond are exempted of tax.
4. Foreign Bonds, are issued by foreign governments or foreign corporations. Foreign corporate bonds are
subject to default risk specially when the bond is denominated in a currency which is different from that of
the investor’s home currency.

 Different Types of Bonds


There are various types of Bonds. A few of them have been discussed below in brief.
 Traditional Bond: A bond in which the entire principal can be withdrawn at a single time after the
bond’s maturity date is over is called a Traditional Bond.
 Callable Bond: When the issuer of the bond calls out his right to redeem the bond even before it
reaches its maturity is called a Callable Bond. Through this type of bonds, the issuer can convert a
high debt bond into a low debt bond.
 Fixed-Rate Bonds: When the coupon rate remains the same through the course of the investment,
it is called Fixed-rate bonds.
 Floating Rate Bonds: When the coupon rate keeps fluctuating during the course of an investment, it
is called a floating rate bond.
 Puttable Bond: When the investor decides to sell their bond and get their money back before the
maturity date, such type of bond is called a Puttable bond.
 Mortgage Bond: The bonds which are backed up by the real estate companies and equipment are
called mortgage bonds.
 Zero-Coupon Bond: When the coupon rate is zero and the issuer is only applicable to repay the
principal amount to the investor, such type of bonds are called zero-coupon bonds.
 Serial Bond: When the issuer continues to pay back the loan amount to the investor every year in
small instalments to reduce the final debt, such type of bond is called a Serial Bond.
DEBT MARKET
 Extendable Bonds: The bonds which allow the Investor to extend the maturity period of the bond
are called Extendable Bonds.
 Climate Bonds: Climate Bonds are issued by any government to raise funds when the country
concerned faces any adverse changes in climatic conditions.
 War Bonds: War Bonds are issued by any government to raise funds in cases of war.
 Inflation-Linked Bonds: Bonds linked to inflation are called inflation linked bonds. The interest rate
of Inflation linked bonds is generally lower than fixed rate bonds

 Features/Characteristics of Bond:
a. Bond Issue Date
The bond issue date is the date that the bond is issued and available for purchase by creditors. Interest
accrues from this date.

b. Bond Face Value


Also called the par value or denomination of the bond, the bond face value is the principal amount of the
debt. It is what the investor lends to the bond-issuing corporation.

c. Bond Coupon Rate


Also known as the bond rate or nominal rate, the bond coupon rate is the nominal interest rate paid on the
face value of the bond. The coupon rate is fixed for the life of the bond.

d. Bond Redemption Value


Also called the maturity value, the bond redemption value is the amount the bond issuer will pay to the
bondholder upon maturity of the bond.

e. Bond redemption Date


Also known as the maturity date or residual maturity, the bond maturity date is the day on which the
redemption price will be paid to the bondholder along with the final interest payment. The residual
maturity of any bond shortens as time passes. Bonds are classified into short term (upto 5 yrs.), mid term
(5-10 yrs.) and long term (over 15 yrs.).

 Behavior of Bond Price:


a. Bond discount: The amount by which the face value of a bond exceeds its current price. When the
market required rate of return is more than the stated coupon rate, the price of the bond will be less than
its face value. Such a bond is said to be selling at a discount from face value. The amount by which the face
value exceeds the current price is the bond discount.

b. Bond premium: The amount by which the current price of a bond exceeds its face value. When the
market required rate of return is less than the stated coupon rate, the price of the bond will be more than
its face value. Such a bond is said to be selling at a premium over face value. The amount by which the
current price exceeds the face value is the bond premium.

c. When the market required rate of return equals the stated coupon rate, the price of the bond will equal
its face value. Such a bond is said to be selling at par.

d. If interest rates rise so that the market required rate of return increases, the bond’s price will fall. If
interest rates fall, the bond’s price will increase. In short, interest rates and bond prices move in opposite
directions.

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