Bond Market
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The key players in the bond market are the issuers, underwriters, and the purchasers. The issuers sell bonds, which are long term debt instruments that offer interest return plus the return on the face value at maturity, to fund operations for their organization. Issuers are mainly governments, banks, and corporations. The underwriters are traditionally investment banks or other financial institutions that help the issuer to sell the bonds. The purchasers are institutional investors, governments, traders, or individuals that buy the debt (bond) being issued in the market.
One type of investment is government bonds. There are three types of government fixed-income securities: bills, notes, and bonds. Bills are debt securities maturing in less than one year, notes mature in one to ten years, and bonds mature in more than ten years (Investopedia, 2005). Treasury bills (T-bills) are not bonds because on the short maturity. Another type of investment is municipal bonds. Municipal bonds are local government bonds, which have returns that are free from federal tax. Corporate bonds have higher yields because the risk is greater with a company than with a government bond. The company’s credit is a major issue when looking at corporate bonds. Corporate bonds are another type of investment in the bond market. The last type in the zero-coupon bonds. Zero-Coupon bonds have no coupon (interest rate) payments but are issued at a considerable discount to par value. Par value is the principal or face value of the bond once the bond matures.
Most transactions are carried out through stockbrokers. Stockbrokers are individuals licensed by the SEC and the securities exchanges to facilitate transactions between buyers and sellers (Gitman & Joehnk, 2005). There are three types of stockbrokers: full-service, premium, and basic discount. The full service brokers provide a full array of services besides the transactions. The premium broker charges low commissions on transactions and provides limited services. The basic discount broker is used mainly for ETF transactions (Gitman & Joehnk, 2005). Normally a bond broker will require a $5,000 minimum deposit. Because of this deposit, many people that can not afford a stockbroker look at mutual fund, which specialize in bond fund. Bond fund is a type of transaction that pays monthly dividends at a higher rate than CD’s and pays more frequently. Other types of transactions are closed-end funds, and