Name: 

Gabrielle Mae R. Operario                                               Date: August 2, 2021

Subject & Class Code: Financial Markets (2-061)

MODULE 3: ASSIGNMENT- BOND MARKET SECURITIES

1. Define Bond Market securities.

A bond market is a place where debt securities are traded. This market includes
government-issued securities as well as corporate debt securities. It enables the
transfer of capital from savers or investors to the issuers who need the capital for
projects and other operations. This market is also known as the debt, fixed-income or
credit market. In the same manner, the bond market broadly describes a marketplace
where investors buy debt securities that are brought to the market by either
governmental entities or corporations. Bonds are either issued on the primary market,
which rolls out new debt, or on the secondary market, in which investors may purchase
existing debt via brokers or other third parties. Bonds tend to be less volatile and more
conservative than stock investments, but also have lower expected returns. To put it
simply, according to what I have understood in the readings of this chapter, Bond
markets are markets in which bonds are issued and traded. It could be the following:
Treasury notes (T-notes) and bonds (T-bonds); Municipal bonds; and Corporate bonds.

2. What are the types and major characteristics of Bonds and the market in which they
trade?

From what I have learned, there are three main types of bonds:

 Corporate bonds are debt securities issued by private and public corporations.

o Investment-grade.  These bonds have a higher credit rating, implying less
credit risk, than high-yield corporate bonds.
o High-yield.  These bonds have a lower credit rating, implying higher credit
risk, than investment-grade bonds and, therefore, offer higher interest
rates in return for the increased risk.
 Municipal bonds, called “munis,” are debt securities issued by states, cities,
counties and other government entities. Types of “munis” include:
o General obligation bonds. These bonds are not secured by any assets;
instead, they are backed by the “full faith and credit” of the issuer, which
has the power to tax residents to pay bondholders.
o Revenue bonds. Instead of taxes, these bonds are backed by revenues
from a specific project or source, such as highway tolls or lease fees. 
Some revenue bonds are “non-recourse,” meaning that if the revenue
stream dries up, the bondholders do not have a claim on the underlying
revenue source.
 o Conduit bonds. Governments sometimes issue municipal bonds on behalf
of private entities such as non-profit colleges or hospitals. These “conduit”
borrowers typically agree to repay the issuer, who pays the interest and
principal on the bonds. If the conduit borrower fails to make a payment,
the issuer usually is not required to pay the bondholders.

 U.S. Treasuries are issued by the U.S. Department of the Treasury on behalf of

the federal government. They carry the full faith and credit of the U.S.
government, making them a safe and popular investment. Types of U.S.
Treasury debt include:
o Treasury Bills. Short-term securities maturing in a few days to 52 weeks
o Notes. Longer-term securities maturing within ten years
o Bonds. Long-term securities that typically mature in 30 years and pay
interest every six months
o TIPS. Treasury Inflation-Protected Securities are notes and bonds whose
principal is adjusted based on changes in the Consumer Price Index. TIPS
pay interest every six months and are issued with maturities of five, ten,
and 30 years.

Moreover, there are also known characteristics of Bonds. Most bonds share some
common basic characteristics including:

 Face value is the money amount the bond will be worth at maturity; it is also the
reference amount the bond issuer uses when calculating interest payments. For
example, say an investor purchases a bond at a premium $1,090 and another
investor buys the same bond later when it is trading at a discount for $980. When
the bond matures, both investors will receive the $1,000 face value of the bond.
 The coupon rate is the rate of interest the bond issuer will pay on the face value
of the bond, expressed as a percentage. For example, a 5% coupon rate means
that bondholders will receive 5% x $1000 face value = $50 every year.
 Coupon dates are the dates on which the bond issuer will make interest
payments. Payments can be made in any interval, but the standard is semi-
annual payments.
 The maturity date is the date on which the bond will mature and the bond issuer
will pay the bondholder the face value of the bond.
 The issue price is the price at which the bond issuer originally sells the bonds.

In regards to which market bonds are traded? We’ll start with the primary
market and by this we mean the offering and sale of a brand new bond. There are two
ways that a company or country initially issues and sells their bonds to investors: a
“bought deal” or an “auction.” And after being initially issued, bonds then trade
in secondary markets. This is where ordinary investors purchase them alongside large
investors. Equally important, bonds can be bought and sold in the “secondary market”
after they are issued. While some bonds are traded publicly through exchanges, most
trade over-the-counter between large broker-dealers acting on their clients' or their own
behalf. A bond's price and yield determine its value in the secondary market.
3. What are the risks involved in trading notes and bonds?

Risk is an inherent part of investing. Generally, investors must take greater risks
to achieve greater returns, however taking on additional risk does not always lead to
greater returns. Investors who take on additional risk, must be comfortable with
experiencing significant periods of underperformance in the expectation of achieving
higher returns over the longer term. Those who do not bear risk very well have a
relatively smaller chance of making high earnings than do those with a higher tolerance
for risk; similarly they have a smaller chance of making significant losses. It's crucial to
understand that there is an inevitable trade-off between investment performance and
risk. Higher returns are associated with higher risks of price fluctuations.

The main risks of investing in bonds include the following:

Interest Rate Risk

Rising interest rates are a key risk for bond investors. Generally, rising interest
rates will result in falling bond prices, reflecting the ability of investors to obtain an
attractive rate of interest on their money elsewhere. Remember, lower bond prices
mean higher yields or returns available on bonds. Conversely, falling interest rates will
result in rising bond prices, and falling yields. Before investing in bonds, you should
assess a bond’s duration (short, medium or long term) in conjunction with the outlook
for interest rates, in order to ensure that you are comfortable with the potential price
volatility of the bond resulting from interest rate fluctuations.

Credit Risk
This is the risk that an issuer will be unable to make interest or principal
payments when they are due, and therefore default. Rating agencies such as Moody’s,
Standard & Poors (S&P) and Fitch assess the credit worthiness of issuers and assign a
credit rating based on their ability to repay its obligations. Fixed income investors
examine the ratings of an issuer in order to establish the credit risk of a bond. Ratings
range from AAA to D. Bonds with a ratings at or near AAA are considered very likely to
be repaid, while bonds with a rating of D are considered to be more likely to default, and
thus are considered more speculative and subject to more price volatility.

Inflation Risk
Inflation reduces the purchasing power of a bond’s future coupons and principal.
As bonds tend not to offer extraordinarily high returns, they are particularly vulnerable
when inflation rises. Inflation may lead to higher interest rates which is negative for bond
prices. Inflation Linked Bonds are structured to protect investors from the risk of
inflation. The coupon stream and the principal (or nominal) increase in line with the rate
of inflation and therefore, investors are protected from the threat of inflation.
Reinvestment Risk
When interest rates are declining, investors may have to reinvest their coupon
income and their principal at maturity at lower prevailing rates.

Liquidity Risk
This is the risk that investors may have difficulty finding a buyer when they want
to sell and may be forced to sell at a significant discount to market value. To minimise
this risk, investors may wish to opt for bonds that are part of a large issue size and also
most recently issued. Bonds tend to be most liquid in the period immediately after issue.
Liquidity risk is usually lower for government bonds than for corporate bonds. This is
because of the extremely large issue sizes of most government bonds. However the
sovereign debt crisis has resulted in a decline in the liquidity of government bonds
issued by smaller European peripheral nations.
These are just some of the risks that are associated with an investment in bonds.
Individual bonds will have their own individual risks. It is critical that investors
understand the effect that these risks can have on their investments.

4. Who are the participants involved in bond markets and give a brief description?

The bond market is for participants that are involved in the issuance and trading
of debt securities. It primarily includes government-issued and corporate debt securities,
and can essentially be broken down into three main groups: issuers, underwriters, and
purchasers.
Bond Issuers
The issuers sell bonds or other debt instruments in the bond market to fund the
operations of their organizations. This area of the market is mostly made up of
governments, banks, and corporations
Bond Underwriters
The underwriting segment of the bond market is traditionally made up of
investment banks and other financial institutions that help the issuer to sell the bonds in
the market. In general, selling debt is not as easy as just taking it to the market. In most
cases, millions (if not billions) of dollars are being transacted in one offering. As a result,
a lot of work needs to be done—such as creating a prospectus and other legal
documents—in order to sell the issue. In general, the need for underwriters is greatest
for the corporate debt market because there are more risks associated with this type of
debt.
Bond Purchasers
The final players in the market are those who buy the debt that is being issued in
the market. They basically include every group mentioned as well as any other type of
investor, including the individual. Bondholders essentially become creditors, or lenders,
to the issuer. If you buy a U.S. Treasury, the federal government owes you money. If
you buy a corporate bond, the company that issued it owes you money. Bonds are
widely considered to be a core part of a well-diversified portfolio.
To sum it up, ISSUERS sell bonds or other debt instruments to raise money;
most bond issuers are governments, banks, or corporate entities. UNDERWRITERS are
investment banks and other firms that help issuers sell bonds. While BOND
PURCHASERS are the corporations, governments, and individuals buying the debt that
is being issued.