2. Contents
Overview
Difference Between Credit and Equity MarketsWhat Happened?
Types of Credit Market Instruments
How the Credit Market Works Summarize
Health of the Credit Market
Why Investors Utilize the Credit Market
Credit Market Participants
What is Credit Market size and importance ?
References
3. Overview
A marketplace for the exchange of debt securities and short-term commercial paper. Companies and
the government are able to raise funds by allowing investors to purchase these debt securities. Activity
in credit markets is often used to gauge investor sentiment. If more bonds from the government are
being purchased, this is typically a good indicator that investors are worried about the stock market.
4. Difference Between Credit and Equity
Markets
While the credit market gives investors a chance to invest in corporate
or consumer debt, the equity market gives investors a chance to invest
in the equity of a company. For example, if an investor buys a bond
from a company, he is lending the company money and investing in the
credit market. If he buys a stock, he is investing in the equity of a
company and essentially buying a share of its profits or assuming a
share of its losses
5. Types of Credit Market Instruments
1. A Simple Loan (ex. Working Capital Loan)
2. A Fixed-Payment Loan (ex. Mortgage Loan)
3. A Coupon Bond (ex. 5-year T-Note)
4. A Discount Bond (ex. 3-month T-Bil
6. How the Credit Market Works
When corporations, national governments and municipalities need to earn money, they issue
bonds. Investors who buy the bonds essentially loan the issuers money. In turn, the issuers
pay the investors interest on the bonds, and when the bonds mature, the investors sell them
back to the issuers at face value. However, investors may also sell their bonds to other
investors for more or less than their face values.
Other parts of the credit market are slightly more complicated, and they consist of consumer
debt, such as mortgages, credit cards and car loans bundled together and sold as an
investment. Simply, as the bank receives payments on the debt, the investor earns interest on
his security, but if too many borrowers default on their loans, the investor loses.
7. Health of the Credit Market
Prevailing interest rates and investor demand are both indicators of the health of the credit
market. Analysts also look at the spread between the interest rates on Treasury bonds and
corporate bonds, including investment-grade bonds and junk bonds. Treasury bonds have
the lowest default risk and, thus, the lowest interest rates, while corporate bonds have more
default risk and higher interest rates. As the spread between the interest rates on those types
of investments increases, it can foreshadow a recession.
8. Why Investors Utilize the Credit
Market
Simply, investors utilize the credit market in hopes of earning money.
Bonds are considered to be safer investments than stocks, as they offer
fixed-income earning potential, and if a company goes bankrupt, it
pays its bondholders before its stockholders. To reduce their exposure
of risk related to any single security, investors invest in mutual funds
and exchange traded funds (ETF) that consist of a group of bonds.
9. Credit Market Participants
Government
Municipalities and government agencies such as Fannie Mae
Institutional investors
Traders
Individuals
10. What is Credit Market size and importance ?
The size of the global bond market is currently estimated to be close to
$100 trillion, a figure which is more than twice that of the global equity
market, as all types of issuers have rushed to take advantage of the
prolonged environment of ultra-low interest rates globally.
Savvy investors thus keep a close eye on it, and often assign more
weight on its moves than those in the equity markets; the first signs of
investing trouble ahead will usually show up here.
The credit market’s size isn’t the only reason investors watch it closely,
however. As it effectively determines the costs of borrowing, it serves as
perhaps the best indication of business and economic conditions in the
future.