2. 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.
3. 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
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 saf 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.