The bond market, also known as the debt, credit, or fixed income market, A financial market where participants buy and sell debt securities usually in the form of bonds. The size of the international bond market is an estimated $45 trillion. U.S. bond market debt is $25.2 trillion.
Background Bond markets play an important role in mobilization of capital. The investments are very necessary for economic development of a country. A good market will help promote economic growth and reduce the risk of financial crises. Bond market of Pakistan is 5% of GDP at the moment which is very small as compared to other economies.
Function of Financial Markets• Channels funds from person or business without investment opportunities (i.e., “Lender-Savers”) to one who has them (i.e., “Borrower-Spenders”)• Improves economic efficiency
Significance of Bond Market for Pakistan Increasing the competitiveness and efficiency of the financial system, which here is dominated by large banks. Enhancing the stability of the financial system by creating alternatives to banks, that will reduce the power of banks simply. It provides a resort for domestic funding and budget deficits other than by central bank. The development of bond market can force the financial intermediaries to develop other products like Repo, Structured finance and Derivatives.
CONTINUE. . . . Cost of debt servicing can be reduced through funding of Government Budget deficits on market-oriented funds. Effective allocation of capital competition in financial sector Supports infrastructure development, privatization, securitization, and the rise of new institutional investors requiring long term assets to match long term liabilities Reduces the currency, interest rate and funding exposures risks
Bond market in Pakistan Liberalization of the financial system and the switch from credit planning to a market based monetary policy has crated a secondary market for government bonds in Pakistan. Trading in treasury bills and in short-term federal bonds provides the basis for open market operations of the state bank. In 1991, the government with the consultation of World Bank, started issuance of two types of securities—one of short-term maturity and the other of long-term maturity on the basis of auction through the intermediation of primary dealers, i.e. treasury Bills (short-term) and federal investment bonds (long-term).
BOND Is a debt security in which authorized issuer owes the holders a debt. Depending on the terms of the bond. Issuer obliged to pay interest and to use/or to repay the principal at a later date. A bond is a formal contact to repay borrowed money with interest at fixed intervals
Types of bondsCorporate Bond• A corporate bond is a bond issue by a corporation.• It is a bond that a corporation issues to raise money effectively in order to expand its business.• The term is usually applied to longer-term debt instruments, generally with a maturity date falling at least a year after their issue date. (The term "commercial paper" is sometimes used for instruments with a shorter maturity.)
Government Bond• A government bond is a bond issued by a national government, generally promising to pay a certain amount (the face value) on a certain date, as well as periodic interest payments.• Government bonds are usually denominated in the countrys own currency.• Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds, although the term "sovereign bond" may also refer to bonds issued in a countrys own currency.
Municipal Bond• A municipal bond is a bond issued by an American city or other local government, or their agencies.• Potential issuers of municipal bonds includes cities, counties, redevelopment agencies, special-purpose districts, school districts, public utility districts, publicly owned airports and seaports, and any other governmental entity (or group of governments) below the state level.• Municipal bonds may be general obligations of the issuer or secured by specified revenues.• In the United States, interest income received by holders of municipal bonds is often exempt from the federal income tax and from the income tax of the state in which they are issued,• although municipal bonds issued for certain purposes may not be tax exempt.
• Secured bonds have specific assets of the issuer pledged as collateral for the bonds. A bond can be secured by real estate or other assets.• Unsecured bonds are issued against the general credit of the borrower; they are also called debenture bonds.• Bonds that mature at a single specified future date are called term bonds.• Bonds that mature in installments are called serial bonds.
• Registered bonds are issued in the name of the owner and have interest payments made by cheque to bondholders of record.• Bearer or coupon bonds are not registered; thus bondholders must send in coupons to receive interest payments.• Convertible bonds permit bondholders to convert the bonds into common shares at their option.• Redeemable (callable) bonds are subject to call and retirement at a stated dollar amount prior to maturity at the option of the issuer.• Retractable bonds are subject to redemption prior to maturity at the option of the holder.
Zero-Coupon Bonds• Do not pay interest• Sold at deep discount from par value• Value increases over time• Subject to tremendous price volatility as interest rates fluctuate• Interest must be reported as it is accrued for tax purposes, even though no interest is actually received.• Treasury strips are zero-coupon bonds created from U.S. Treasury securities
Junk Bonds• Highly speculative, usually subordinated debentures• Have low, sub-investment grade ratings• Typically offer very high yields• Prices tend to behave more like stocks than bonds