Basic Guide to Bond Markets

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A bond market is a segment of the capital market of interest bearing securities. The issued securities may be resold in the secondary market. The trading volume of bonds on the international bond market are nominal compared to the stock market which are much higher.

The government bond market dominates a great deal of activities in this domain due its ernomous size, liquidity and lack of credit risk. The bond market is frequently applied to signal variations in interest rates, this is mainly because of the inverse relationship between bond valuation and interest rates,

Bonds were used since the early days, on top of the long-term refinancing, and procurement of capital options, which came with short repayment periods.

The first liquid bond markets were in Amsterdam and London. And the founding of the United East India Company in 1602 created the need for financing maritime trade to grow strong.

In those days international maritime trade was carried out mostly through medium bonds. The Dutch capital market was the dominant force as the most important capital market until well into the eighteenth century.

In the modern day, bond markets in a majority of countries are largely decentralized and do not come with exchange offerings like stock, future and commodity markets.

Apart from other causes, the decentralized market structure of the corporate and municipal bond markets, is dissimilar from the stock market structure, and tops with significantly higher transaction charges and less liquidity.

Municipal bond trades are also considerably more pricey compared to similar sized equity trades. This is attributed to the lack of price transparency in the bond markets, and also bond trading costs decrease with credit quality and increase with instrument complexity.

Effective spreads in municipal bonds average about two percent of the price for retail size trades of twenty thousands and about one percent for institutional trade size trades of two hundred thousand dollars.

Fixed-interest securities can also be divided into securitized and unsecured instruments. Among the titles are securitized individual documents and collection documents, title unsecured debt include individual and collective debt loans and bonds. And the price of the bond is measured by the indices.

The global bond market grew in the 1990s boosted by the expansion of the segment for corporate bonds. The main markets are distinguished on paper in terms of economic development ranging from the smaller industrialized countries to the developing countries or emerging markets. These states often borrow in foreign currencies and must offer higher interest rates to be in a position to secure their financial needs.

 

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