Debt Securities Market

Group 6
Financial market is a forum or market that enables
suppliers and demanders of funds to make transactions.
This can be money market or capital market in the form
of debt or equity/stock transactions. Debt can be short
term or long term that is why it can be within money
market definition if short term, while in capital market if
long term. Equity or stock is normally long term.
 Debt market or Debt Securities Market is the financial market where the debt instruments or
securities are transacted by suppliers and demanders of funds. This chapter shall focus on this
type of financial market.
 Debt Instrument
 A debt instrument is a paper or electronic obligation that enables the issuing party to raise funds
by promising to repay a lender in accordance with terms of a contract Types of debt instruments
include notes, bonds, debentures, certificates, mortgages, leases or other agreements between a
lender and a borrower. These instruments provide a way for market participants to easily
transfer the ownership of debt obligations from one party to another
 A debt instrument is legally enforceable evidence of a financial debt and the promise of
timely repayment of the principal, plus any interest. The importance of a debt
instrument is twofold. First, it makes the repayment of debt legally enforceable.
Second, increases the transferability of the obligation, giving it increased liquidity and
giving creditors a means of trading these obligations on the market. Without debt
instruments acting as a means of facilitating trading, debt would only be an obligation
from one party to another. However, when a debt instrument is used as a trading means,
debt obligations can be moved from one party to another quickly and efficiently.
Types of Debt instruments
Debt instruments can be either long-term obligations or short-
term obligations Short-term debt instruments, both personal and
corporate, come in the form of obligations expected to be repaid
within one calendar year. Long-term debt instruments are
obligations due in one year or more, normally repaid through
periodic installment payments.
 Short-Term Debt Instruments
 From a personal finance perspective, short-term debt instruments
come in the form of credit card bills, payday loans, car title loans and
other consumer loans that have repayment terms of less than 12
months. If a person incurs a credit card bill of Php 1,000, the debt
instrument is the agreement that outlines the obligated payment terms
between the borrower and the lender
 In corporate finance, short-term debt usually comes in the form of revolving lines of
credit, loans that cover networking capital needs and Treasury bills. If for example, a
corporation looks to cover six months of rent with a loan while it tries to raise
venture funding, the loan is considered a short-term debt instrument.
 Long-Term Debt Instruments
 Long-term debt instruments in personal finance are usualy mortgage payments or car
loans. For example, if an individual consumer takes out a 30-year mortgage for Php
500,000, the mortgage agreement between the borrower and the mortgage bark is the
long-term debt instrument.
 Debt Security
 Debt security refers to a debt instrument, such as a government bond, corporate
bond, certificate of deposit (CD), municipal bond or preferred stock, that can be
bought or sold between two parties and has basic terms defined, such as notional
amount (amount borrowed), interest rate, and maturity and renewal date. It also
includes collateralized securities, such as colateralced debt obligations (CDOs),
collateralized mortgage obligations (CMOS), mortgage-backed securities issued
by the Government National Mortgage Association (GNMAs) and zero-coupon
securities.
 The interest rate on a debt security is largely determined by the perceived
repayment ability of the borrower, higher risks of payment default almost
always lead to higher interest rates to borrow capital. Also known as fixed-
income securities, most debt securities are traded over the counter. The
total dollar value of debt security trades conducted daily is much larger
than that of stocks, as debt securities are held by many large institutional
investors as well as governments and nonprofit organizations
Types of Debt Securities
Debt securities, sometimes referred to as fixed-income
securities, include money market securities and capital
market debt securities such as notes, bonds, and mortgage
backed securities. Like Debt instruments, debt security can
be classified into short term/money market debt securities or
long term/capital market securities
 Money market debt securities
 Money market securities are debt securities with maturities of less than
one year. Money market securities of most interest to individual investors
are treasury bills (T-bills) and certificates of deposit (CDs)
 Capital market debt securities
 Capital market debt securities are debt securities with maturities of longer
than one year. Examples are notes, bonds, and mortgage-backed
securities.
 Debt Security vs. Debt Instrument
 Usually Financial Instruments and Financial Securities are
interchangeably used however technically these two are different. Not all
financial instruments are securities. A security is a fungible, negotiable
financial instrument that holds some type of monetary value. It
represents an ownership position in a publicly-traded corporation (via
stock), a creditor relationship with a governmental body or a corporation
(represented by owning that entity's bond), or rights to ownership as
represented by an option.
 Financial Instruments are called securities since securities carry some value on
them. When they are exchanged in the market, the realization will be in the form
of cash and a benefit for the holder of the securities.
 Alternately we can call financial instruments are called Securities, since they are
backed by Corporations or Government. Take for example Government Bonds,
Money market Instruments. Equities or Shares though have no formal backing,
still they carry value on them and when they are exchanged in the secondary
market, the shareholder will still be able to receive cash
 With the above, debt securities therefore are negotiable and tradable
debt instruments which carry value on them. A credit card bills and
payday loans for example are just debt instrument but not debt
securities. On the other hand, Government bonds are debt instrument
and also debt securities since they carry value that is negotiable and
tradable in the financial market and that holder will still be able to
receive cash.
 Safety of Debt Securities
 Debt securities have an implicit level of safety simply because they ensure that the principal amount that
is returned to the lender at the maturity date or upon the sale of the security. They are typically classified
by their level of default risk, the type of issuer and income payment cycles. The riskier the bond, the
higher its interest rate or return yield.
 For example, Treasury bonds, issued by the U.S. Treasury Department, have lower interest rates than
bonds issued by corporations. Corporate and government bonds. however, are both rated by agencies such
as Standard & Poor's and Moody's Investors Service. These agencies assign a rating, similar to the credit
scores assigned to individuals, and bonds with high ratings tend to have lower interest rates than bonds
with low ratings. For example, historically, corporate AAA bonds have lower yields than corporate BBB
bonds
 The Bond Market
 Debt market or Debt securities market is also known as bond market is a financial
market in which the participants are provided with the issuance and trading of debt
securities. The bond market primarily includes government-issued securities and
corporate debt securities, facilitating the transfer of capital from savers to the issuers or
organizations requiring capital for government projects, business expansions and
ongoing operations. In the bond market, participants can issue new debt in the market
called the primary market or trade debit securities in the market called the secondary
market. These products are typically in the form of bonds, but they may also come in
the form of bills and notes. The goal of the bond market is to provide long-term
financial aid and funding for public and private projects and expenditures
 The participants of the bond market are nearby the same as the
participants in other financial markets. In bond markets, the
participants are either buyers of funds (that is, debt issuers) or sellers
of funds (institutions) Participants include institutional investors,
traders, governments and individual's who purchase products
provided by large institutions. These projects may be in the form of
pension funds, mutual funds and life insurance, among many other
product types.
 Types of Bond Markets
 The general bond market can be classified into corporate bonds, government and
agency bonds, municipal bonds, mortgage-backed bonds, asset-backed bonds,
and collateralized debt obligations
 Corporate Bond
 Corporations provide corporate bonds to raise money for different reasons, such
as financing ongoing operations or expanding businesses. The term "corporate
bond is usually used for longer-term debt instruments that provide a maturity of
at least one year.
 Government Bonds
 National governments issue government bonds and entice buyers by providing
the face value on the agreed maturity date with periodic interest payments. This
characteristic makes government bonds attractive for conservative investors.
 Municipal Bonds
 Local governments and their agencies, states, cities, special-purpose districts,
public utility districts, school districts, publicly owned airports and seaports, and
other government-owned entities issue municipal bonds to fund their projects.
Financial market is a forum or market that enables
suppliers and demanders of funds to make transactions.
This can be money market or capital market in the form
of debt or equity/stock transactions. Debt can be short
term or long term that is why it can be within money
market definition if short term, while in capital market if
long term. Equity or stock is normally long term.