Bond market

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Securities

Securities Bond Commercial paper Hybrid security Stock Warrant
Markets Bond market Stock market Stock exchange
Stocks Share Stock Warrant
Bonds by coupon Fixed rate bond Floating rate note Zero coupon bond Inflation-indexed bond
Bonds by collateral Asset-backed security Collateralized debt obligation Collateralized mortgage obligation Credit linked note Mortgage-backed security Unsecured bond
Bonds by issuer Corporate bond Government bond Municipal bond Sovereign bond

The bond market, also known as the debt, credit, or fixed income market, is 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 and the size of outstanding U.S. bond market debt is $25.2 trillion. ^[1]

The majority of trading volume in the bond market takes place between broker-dealers and large institutions in a decentralized, over-the-counter (OTC) market. However, a small number of bonds, mainly corporate, are listed on exchanges.

References to the "bond market" usually refer to the government bond market because of its size, liquidity, lack of credit risk and therefore, sensitivity to interest rates. Because of the inverse relationship between bond valuation and interest rates, the bond market is often used to indicate changes in interest rates or the shape of the yield curve.

1 Market structure
2 Types of bond markets
3 Bond holders
4 Bond Investments
5 Bond market volatility
6 See also
7 Notes
8 External links

[edit] Market structure

Unlike the stock market, or markets for futures and options, bond markets in most countries remain decentralized and lack common exchanges. This has occurred, in part, because no two bond issues are exactly alike, and the number of different securities outstanding is far larger. In the United States, various banks act as market makers - though they are not obligated to buy or sell and may stop participation at any time.

[edit] Types of bond markets

The Bond Market Association classifies the broader bond market into five specific bond markets.

Corporate
Government & Agency
Municipal
Mortgage Backed, Asset Backed, and Collateralized Debt Obligation
Funding

[edit] Bond holders

Because of the individuality of individual bond issues, and the lack of liquidity in many smaller issues, in most countries, the majority of outstanding bonds are held by institutions like pension funds, banks and mutual funds. In the United States, approximately 10% of the market is currently held by private individuals.

[edit] Bond Investments

Individuals, however, can invest in bonds through fixed income mutual funds. While most such funds will diversify, using the Lehman Brothers Aggregate Bond Index (LBAG) as a benchmark, some will specialize in municipal bonds or high-yield bonds.

[edit] Bond market volatility

For market participants who own a bond, collect the coupon and hold it to maturity, market volatility is irrelevant; principal and interest are received according to a pre-determined schedule.

But participants who buy and sell bonds before maturity are exposed to many risks, most importantly changes in interest rates. When interest rates increase (decrease), the value of existing bonds falls (rises), since new issues pay a higher (lower) yield. This is the fundamental concept of bond market volatility: changes in bond prices are inverse to changes in interest rates.