BOND MARKET

What are bonds? - Debt instruments issued by the Central and State governments and public sector organizations, corporate debt securities.

Important terms
Maturity & term to maturity- maturity refers the date on which the borrower has agreed to repay (redeem)the principal amount to the lender. Term to maturity refers to the number of years remaining for the bond to mature Coupon rate- Coupon Rate refers to the periodic interest payments that are made by the borrower Principal- is the amount that has been borrowed, and is also called the par value or face value of the bond (usually 100) Price of a bond- price at which is it traded. (can be less/equal/greater than 100)

 Example 5- year bond with a face value of 1000 at 8percent, with half-yearly coupon payments = we receive Rs. 40 every half yearly for 5 yearsresulting in 10 coupon payments. Hence the cash flows are40,40,40,40,40,40,40,40,40,1040.

Types of Bonds
Zero coupon bonds Floating interest-rate bonds Deferred interest bonds Step-up bonds Convertible bonds Amortizing bonds

Trading
OTC- through organized electronic trading networks Primary Market- debt securities are issued and sold by borrowers to lenders Secondary Market- investors buy and sell previously issued debt securities amongst themselves