Bond Market/Fixed Income Market Basics

 

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A bond is a basic financial instrument issued by a borrower or debtor to lenders or investors. The issuer repays the amount borrowed and interest on the borrowed amount over the period of borrowing.

Issuer:
An issuer is a borrower or debtor of funds who issues bonds to investors to raise money to meet its financial needs like improving infrastructure, expansions, mergers, acquisitions.

Types of issuers:
The following entities issue bonds either in domestic or in foreign markets.

The issuer of a bond greatly influences the nature of the bond. The bonds issued by the central or federal governments are considered to be low risk bonds because the central or federal government can always print money and payback if it could not generate money from taxes. These are also called treasury bonds.

Bonds issued by municipal corporations are riskier compared to treasury bonds. But these can also be backed by local tax receipts i.e. if it could not repay the money the investor can raise them.

Corporate bonds are more risky compared to the above two categories of bonds. The quality of a corporate bond depends on the financial healthiness of the issuing corporate. Usually corporate bonds are backed by pooling some assets (called Asset Backed Securities, ABS). Corporates prefer to raise funds by issuing bonds rather than issuing shares because they need not give partial ownership to the investors and they can repay the money whenever they want by issuing callable bonds. Corporate bonds offer high interest rates because of the inherent risk.

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May 25, 2008 | Filed Under Bonds 

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