Even small towns issue bonds to finance capital expenditures such as schools, fire stations, and roads. Each kind of bond has its own market. Private placement An issuance of bonds through a private deal rather than through the public markets. The investors in privately placed bonds are institutional investors such as insurance companies, endowments, and pension funds. Treasury bonds are issued to the primary market through auctions.voortticonconsmon.cf/2473.php
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Participants, usually dealers or institutional investors, bid for the bonds, but no one participant is allowed to buy enough shares to monopolize the secondary market. Individuals can also buy Treasuries directly from the U. Corporate bonds are traded in over-the-counter transactions through brokers and dealers. Because the details of each bond issue may vary—maturity, coupon rate, callability, convertibility, covenants, and so on—it is hard to directly compare bond values the way stock values are compared.
As a result, the corporate bond markets are less transparent to the individual investor.
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To provide guidance, rating agencies Analysts of bond default risk that assign ratings to bonds. Ratings agencies such as Fitch Ratings, A. Ratings agencies use an alphabetical system to grade bonds shown in Figure Bonds rated below BBB or Baa are speculative in that they carry some default risk. These are called speculative grade bonds High yield bonds rated BB or Ba or lower and considered to have significant default risk.
Bonds may receive a speculative rating if their issuers are young companies, in a highly competitive market, or capital intensive, requiring lots of operating capital. Any of those features would make it harder for a company to meet its bond obligations and thus may consign its bonds to a speculative rating.
In the s, for example, companies such as CNN and MCI Communications Corporation issued high-yield bonds, which became lucrative investments as the companies grew into successful corporations. The default risk analysis is similar to equity analysis, but bondholders are more concerned with cash flows—cash to pay back the bondholders—and profits rather than profits alone. Bond ratings can determine the coupon rate the issuer must offer investors to compensate them for default risk. The higher the risk, the higher the coupon must be. Ratings agencies have been criticized recently for not being objective enough in their ratings of the corporations that hire them.
Nevertheless, over the years bond ratings have proven to be a reliable guide for bond investors.
Previous Section. Table of Contents. Next Section. Differentiate the roles of various U. List the types and features of state and municipal bonds.
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Compare and contrast features of the corporate bond markets, the markets for corporate stock, and the markets for government bonds. Explain the role of rating agencies and the process of bond rating. Bonds In addition to financing government projects, bonds are used by corporations to capitalize growth. Bond Markets The volume of capital traded in the bond markets is far greater than what is traded in the stock markets. Key Takeaways Bond features that can determine risk and return include coupon and coupon structure, maturity, callablility, and convertibility, security or debenture, seniority or subordination, covenants.
State and municipal governments issue revenue bonds, secured by project revenues, or general obligation bonds, secured by the government issuer. State and municipal government muni bonds may or may not have tax advantages for certain investors. Corporate bonds may be issued through the public bond markets or through private placement. The secondary bond market offers little transparency because of the differences among bonds and the lower volume of trades.
To help provide transparency, rating agencies analyze default risk and rate specific bonds. Access to bond ratings at these sites requires registration, but other information is readily available. What do the data generally show about the relationship between ratings and defaults on corporate bonds? What state government activities or expenditures do the bond issues finance?
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Now find the current bond rating for your city or town. In My Notes or your personal finance journal, write an explanation of why you might or might not invest in your city or town and state at this time. In general, why might you want to invest in municipal bonds?
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What role would bonds play in your investment portfolio? Alternatively, when purchasing a zero coupon bond issued by a U. Zero coupon bonds were first introduced in the s, but they did not become popular until the s. The use of these instruments was aided by an anomaly in the US tax system, which allowed for deduction of the discount on bonds relative to their par value. This rule ignored the compounding of interest and led to significant tax-savings when the interest is high or the security has long maturity. Although the tax loopholes were closed quickly, the bonds themselves are desirable because of their simplicity.
In India, the tax on income from deep discount bonds can arise in two ways: interest or capital gains. It is also a law that interest has to be shown on an accrual basis for deep discount bonds issued after February From Wikipedia, the free encyclopedia. This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. Derivatives Credit derivative Futures exchange Hybrid security. Foreign exchange Currency Exchange rate. Forwards Options. Spot market Swaps. New York: Addison Wesley.
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