Bond

An ordinary bond is an agreement that merely entitles one party to make and another to receive a series of cash flows. A debt instrument issued for a period of more than one year with the purpose of raising capital by borrowing. The Federal government, states, cities, corporations, and many other types of institutions sell bonds. Generally, a bond is a promise to repay the principal along with interest (coupons) on a specified date (maturity). Some bonds do not pay interest, but all bonds require a repayment of principal. When an investor buys a bond, he/she becomes a creditor of the issuer. However, the buyer does not gain any kind of ownership rights to the issuer, unlike in the case of equities.

A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities.

International Bond Market & Equity Market

Bond Market
Bond market is much more popular than stock markets in most parts of the world. The bond market (also known as the credit, or fixed income market) is financial where participants can issue new debt, known as the primary, or buy and sell debt securities, known as the Secondary market, usually in the form of bonds. The primary goal of the bond market is to provide References to the "bond market" usually refer to the bond market, because of its size, liquidity, relative lack of credit risk and, therefore, sensitivity to interest rates. Because of the inverse relationship between bond and interest rates, the bond market is often used to indicate changes in interest rates or the shape of the yield curve.

Introduction to International Bond Markets

International Bond Market is very big and has an estimated size of nearly $47 trillion. The size of the US bond market is the largest in the world. The US bond market's outstanding debt is more than $25 trillion. The International Bond Market has grown double in size since the year 2000. By the end of the year 2006 it has been recorded that nearly $10 trillion of the bonds were outstanding as far as International Capital Market Association data are concerned. This rapid growth of the International Bond Market is due to the bonds that are issued by the various multinational companies. Debt certificates have been traded internationally for several centuries. Kings and emperors borrowed heavily to finance their wars. Although debt financing has always been international in nature, there is still no unified international bond market. The international bond market is divided into three bond market groups i. Domestic bonds. They are issued locally by a domestic borrower and are usually denominated in the local currency.

International Bond Market & Equity Market

ii.

Foreign bonds.

They are issued on a local market by a foreign borrower and are usuallydenominated in the local currency. Foreign bond issues and trading are under the supervision of local market authorities. iii. Eurobonds.

A Eurobond is issued by an international syndicate and categorized according to the currency in which it is denominated. A Eurodollar bond that is denominated in U.S. dollars and issued in Japan by an Australian company would be an example of a Eurobond.Eurobonds are attractive financing tools as they give issuers the flexibility to choose the country in which to offer their bond according to the country's regulatory constraints. They may also denominate their Eurobond in their preferred currency.

Types of Bond Market

The Securities Industry and Financial Markets Association (SIFMA) classifies the broader bond market into five specific bond markets. The Securities Industry and Financial Markets Association(SIFMA) is a leading securities industry trade group[1] representing securities firms, banks, and asset management companies in the U.S. and Hong Kong. SIFMA was formed on November 1, 2006, from the merger of The Bond Market Association and the Securities Industry Association. It has offices in City and Washington, D. C.

Corporate Government & agency Municipal Mortgage backed, asset backed, and collateralized debt obligation Funding

International Bond Market & Equity Market

Municipal bonds
Municipal bonds (also known as munis) are attractive to many investors because the interest income is exempt from federal income tax, and in many cases, state and local taxes as well. In addition, munis often represent investments in state and local government projects that have an impact on our daily lives, including schools, highways, hospitals, housing, sewer systems and other important public projects. Municipal bonds are debt obligations issued by states, cities, counties and other governmental entities, which use the money to build schools, highways, hospitals, sewer systems, and many other projects for the public good. When you purchase a municipal bond, you are lending money to a state or local government entity, which in turn promises to pay you a specified amount of interest (usually paid semiannually) and return the principal to you on a specific maturity date. Not all municipal bonds offer income exempt from both federal and state taxes. There is an entirely separate market of municipal issues that are taxable at the federal level, but still offer a stateand often localtax exemption on interest paid to residents of the state of issuance.

Corporate Bonds
Corporate bonds (also called corporate) are debt obligations, issued by private and public corporations. They are typically issued in multiples of $1,000 and/or $5,000. Companies use the funds they raise from selling bonds for a variety of purposes, from building facilities to purchasing equipment to expanding their business. When you buy a bond, you are lending money to the corporation that issued it. The corporation promises to return your money (also called principal) on a specified maturity date. Until that time, it also pays you a stated rate of interest, usually semiannually. The interest payments you receive from corporate bonds are taxable. Unlike stocks, bonds do not give you an ownership interest in the issuing corporation.

International Bond Market & Equity Market

Corporate secured bonds can take the following forms: Mortgage Bonds

Bonds backed by real estate and/or the physical assets of the corporation with a greater value than the one of the bond. In case of defaults, the assets are sold off to pay off the mortgage bondholders. Closed end assets means that the asset used to secure the bonds are restricted to this issue, while open end assets can be used for other issues, with equal right on the collateral. Equipment Trust Certificates:

Bond secured by assets whose depreciation rate is lower than the capital repayment on the loan, hence making the bond secure. Usually the bond is used to buy only a given percentage of the assets. In case of default, the equipment is sold off to pay bondholders. Income Bonds: bonds paying interest if earned by the company.

Usually, issued by a company in bankruptcy or close to bankruptcy, These bonds do not trigger a credit event in the case of a failure to pay The interest. In contrast, creditors agree that interest will only be paid to the extent earned to allow the company to survive a close to bankruptcy situation

Agency Bonds
Agency bonds are issued by two types of entities1) Government Sponsored Enterprises (GSEs), usually federally-chartered but privately-owned corporations; and 2) Federal Government agencies which may issue or guarantee these bondsto finance activities related to public purposes, such as increasing home ownership or providing agricultural assistance. Agency bonds are issued in a variety of structures, coupon rates and maturities. Each GSE and Federal agency issues its own bonds, with sizes and terms appropriate to the needs and purposes of the financing. There are usually minimums to invest in agency bonds $10,000 for the first investment and increments of $5,000 for additional investments. Investing in Ginnie Mae Federal Agency bonds requires a $25,000 minimum investment. The degree to which an agency bond issuer is considered independent from the federal government impacts the
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level of its default risk. The interest from most but not all agency bond issues is exempt from state and local taxes; some of the biggest issuers such as GSE entities Freddie Mac and Fannie Mae are fully taxable. In general the agency bond market is considered a liquid market, in which investments can quickly and easily be bought and sold. However, as explained below, some agency bond issues have features that make the bond issues more "structured" and complex, which can reduce liquidity of these investments for investors and make them unsuitable for individual investors. Agency Bonds issued by GSEs

Bonds issued by GSEs such as the Federal Home Loan Mortgage Association (Freddie Mac), the Federal Home Loan Mortgage Association (Fannie Mae) and the Federal Home Loan Banks provide credit for the housing sector. Federal Agricultural Mortgage Corporation (Farmer Mac); the Farm Credit Banks and the Farm Credit System Financial Assistance Corporation do the same for the farming sector. The bulk of all agency bond debtGSEs and Federal Government agenciesis issued by the Federal Home Loan Banks, Freddie Mac, Fannie Mae and the Federal Farm Credit banks. GSEs are not backed by the full faith and credit of the U.S. government, unlike U.S. Treasury bonds. These bonds have credit risk and default risk and the yield on these bonds is typically slightly higher than on U.S. Treasury bonds. Agency Bonds issued by Federal Government agencies

Bonds issued or guaranteed by Federal Government agencies such as the Small Business Administration, the Federal Housing Administration and the Government National Mortgage Association (Ginnie Mae) are backed by the full faith and credit of the U.S. government, just like U.S. Treasury bonds.* Full faith and credit means that the U.S. government is committed to pay interest and principal back to the investor at maturity. Because different bonds have different structures, bonds issued by federal government agencies may have call risk. In addition, agency bonds issued by Federal Government agencies are less liquid than Treasury bonds and therefore this type of agency bond may provide a slightly higher rate of interest than Treasury bonds.

International Bond Market & Equity Market

Mortgage Backed, Asset Backed, and Collateralized Debt Obligation

A mortgage-backed security (MBS) is an security that represents a claim on the cash flows from loans through a process known as securitization. Securitization* is the process of creating securities by pooling together various cash-flow producing financial assets. These securities are then sold to investors. Securitization, in its most basic form, is a method of financing assets. Any asset may be securitized as long as it is cash-flow producing. The terms asset-backed security (ABS) and mortgage-backed security(MBS) are reflective of the underlying assets in the security. Securitization provides funding and liquidity for a wide range of consumer and business credit needs. These include securitizations of residential and commercial mortgages, automobile loans, student loans, credit card financing, equipment loans and leases, business trade receivables, and the issuance of asset-backed commercial paper, among others. Securitization transactions can take a variety of forms, but most share several common characteristics. Securitizations typically rely on cash flows generated by one or more underlying financial assets (such as mortgage loans), which serve as the principal source of payment to investors, rather than on the general credit or claims-paying ability of an operating entity. Securitization allows the entity that originates or holds the assets to fund those assets efficiently, since cash flows generated by the securitized assets can be structured, or tranched, in a way that can achieve targeted credit, maturity or other characteristics desired by investors.

MORTGAGE BACK SECURITIES

A growing business has consisted in pooling mortgage and splitting their cash flows into a number of tranches corresponding to different credit risk. The so-called tranches are often categorizes by their seniority (order of priority of the debtor when there is default) but also their average life, coupon, stability and so on. These synthesized securities are part of the repackaging business, which consists in restructuring existing asset in a more efficient way.
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COLLATERISED DEBT AND LOAN OBLIGATIONS (CDO, CLO)

In simple terms, think of a CDO as a promise to pay cash flows to investors in a prescribed sequence, based on how much cash flow the CDO collects from the pool of bonds or other assets it owns. If cash collected by the CDO is insufficient to pay all of its investors, those in the lower layers (tranches) suffer losses first. Collateralized Debt Obligation is very similar to collateralized mortgage obligations with the only difference that low-rated bonds instead of mortgages are used as collateral. Similarly, Collateralized Loan obligations are structured bond backed by the loan repayments from a portfolio of pooled personal or commercial loans, excluding mortgages. These structures are very attractive for investors that otherwise would not have exposure to these markets, while allowing a bank, and more generally a financial institution.

Funding Bond market or Bond Funds

Bond fundsincluding mutual funds (open-end and closed-end, actively managed and indexed), exchange-traded funds and unit investment trustsoffer a convenient and affordable way to invest in a diversified portfolio of bonds, but a bond fund investment can differ from a bond investment in ways that are important to understand.
Types of bond funds

Bond mutual funds can be actively managed or indexed, open-end, closed end or exchange traded funds.

Actively managed bond funds, as their names suggest, have managers who buy and sell

bonds in pursuit of their investment objective. They sometimes sell bonds at a profit, creating a capital gain, or at a loss if they need cash to pay shareholders who want to sell their shares.

Index bond funds are not actively managed but constructed to match the composition of a

given bond index, such as the Lehman 10-year Bond Index. When the index changes, the portfolio changes automatically.

Sponsors of open-end bond funds (usually a mutual fund company) offer new shares and redeem existing shares continuously, requiring their managers to invest cash coming into the fund and

International Bond Market & Equity Market

liquidate positions when they need cash to meet redemptions. Investors in open end funds have the choice to collect their interest income and capital gains or reinvest them automatically in new funds shares.

Closed-end bond funds have a fixed number of shares that trade on exchanges similar to

stocks at a price that may be above or below net asset value depending on supply and demand. Closed-end bond funds can be indexed or actively managed. To buy or sell shares in a closed end fund, you have to go through a broker and pay a commission.

Exchange traded funds (ETFs) represent shares in a basket of bonds that mirrors an

index, but the number of shares is not fixed. ETFs trade on an exchange, with shares bought and sold through brokers who charge commissions.

Unit investment trusts are a portfolio of bonds held in a trust that sells a fixed number of

shares. On the trusts maturity date, the portfolio is liquidated and the proceeds returned to unit holders on a pro rata basis. UITs are usually created by brokerage firms that maintain a limited secondary market for the units. Unit holders who want to sell before maturity may have to accept less than they paid.

International Bond Market & Equity Market

International Equity Market

Equity
A stock or any other security representing an ownership interest. On a company's balance sheet, the amount of the funds contributed by the owners (the stockholders) plus the retained earnings (or losses). Also referred to as "shareholders' equity". In terms of investment strategies, equity (stocks) is one of the principal asset classes. The other two are fixed-income (bonds) and cash/cash-equivalents. These are used in asset allocation planning to structure a desired risk and return profile for an investor's portfolio.

Types of Equity
There are a number of types of equity, each with different charactenstics.

Common stock or ordinary shares

Common stock, as it is known in the United States, or ordinary shares, according to British terminology, is the most important form of equity investment. An owner of common stock is part owner of the enterprise and is entitled to vote on certain important matters, including the selection of directors. Common stock holders benefit most from improvement in the firm's business prospects. But they have a claim on the firm's income and assets only after all creditors and all preferred stock holders receive payment. Some firms have more than one class of common stock, in which case the stock of one class may be entitled to greater voting rights, or to larger dividends, than stock of another class. This is often the case with family owned firms

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which sell stock to the public in a way that enables the family to maintain control through its ownership of stock with superior voting rights.

Preferred stock
Also called preference shares, preferred stock is more akin to bonds than to common stock. Like bonds, preferred stock offers specified payments on specified dates. Preferred stock appeals to issuers because the dividend remains constant for as long as the stock is outstanding, which may be in perpetuity. Some investors favour preferred stock over bonds because the periodic payments are formally considered dividends rather than interest payments, and may therefore offer tax advantages. The issuer is obliged to pay dividends to preferred stock holders before paying dividends to common shareholders. if the preferred stock is cumulative, unpaid dividends may accrue until preferred stock holders have received full payment. In the case of non cumulative preferred stock, preferred stock holders may be able to impose significant restrictions on the firm in the event of a missed dividend.

Convertible preferred stock

This may be converted into common stock under certain conditions, usually at a predetermined price or within a predetermined time period. Conversion is always at the owner's option and cannot be required by the issuer. Convertible preferred stock is similar to convertible bonds.

Warrants
Warrants offer the holder the opportunity to purchase a firm's common stock during a specified time period in future, at a predetermined price, known as the exercise price or strike price. The tangible value of a warrant is the market price of the stock less the strike price. If the tangible value when the warrants are exercisable is zero or less the warrants have no value, as the stock can be acquired more cheaply in the open market. A firm may sell warrants directly, but more often they are incorporated into other securities, such as preferred stock or bonds. Warrants are created and sold by the firm that issues the underlying stock. In a rights offering, warrants are allotted to existing stock holders in proportion to their current holdings. If all shareholders subscribe to the offering the firm's total capital will increase, but each stock holder's
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proportionate ownership will not change. The stock holder is free not to subscribe to the offering or to pass the rights to others. In the UK a stock holder chooses not to subscribe by filing a letter of renunciation with the issuer.

Issuing shares
Few businesses begin with freely traded shares. Most are initially owned by an individual, a small group of investors (such as partners or venture capitalists) or an established firm which has created a new subsidiary. In most countries, a firm may not sell shares to the public until it has been in operation for a specified period. Some countries bar firms from selling shares until their business is profitable, a requirement that can make it difficult for young firms to raise capital.

What Does Equity Market Mean?

The market in which shares are issued and traded, either through exchanges or over-the-counter markets. Also known as the stock market, it is one of the most vital areas of a market economy because it gives companies access to capital and investors a slice of ownership in a company with the potential to realize gains based on its future performance.

Why are these markets important?

Both markets are of central importance to economic activity. The bond market is vital for economic activity because it is the market where interest rates are determined. Interest rates are important on a personal level, because they guide our decisions to save and to finance major purchases (such as houses, cars, and appliances, to give a few examples). From a macroeconomic standpoint, interest rates have an impact on consumer spending and on business investment. The stock market is equally important for economic activity because it affects both investment spending and consumer spending decisions. The price of shares determines the amount of funds that a firm can raise by selling newly issued stock. That, in turn, will determine the amount of capital goods this firm can acquire and, ultimately, the volume of the firms production.
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Stock Market VS Bond Market

The bond market is where investors go to trade (buy and sell) debt securities, prominently bonds. The stock market is a place where investors go to trade (buy and sell) equity securities like common stocks and derivatives (options, futures etc). Stocks are traded on stock exchanges. In the United States, the prominent stock exchanges are: Nasdaq, Dow, S&P 500 and AMEX. These markets are regulated by the Securities Exchange Commission (SEC).

The differences in the bond and stock market lie in the manner in which the different products are sold and the risk involved in dealing with both markets. One major difference between both markets is that the stock market has central places or exchanges (stock exchanges) where stocks are bought and sold. However, the bond market does not have a central trading place for bonds; rather bonds are sold mainly over-the-counter (OTC). The other difference between the stock and bond market is the risk involved in investing in both. Investing in bond market is usually less risky than investing in a stock market because the bond market is not as volatile as the stock market is.

How Do Bonds Interact with the Stock Market?

It is a general rule of thumb that bonds and stocks move in the opposite directions. In other words, when stocks go up in value, bonds go down. This is because stocks generally do well when the economy is booming -- consumers are buying, companies are making more earnings, and investors have more to invest. Conversely, when the economy starts to decline, companies earnings will drop, and stock prices will plummet -- this is when investors want the safe interest payments guaranteed by bonds.However, sometimes both stocks and bonds go up in value at the same time. It could the case when some investors are optimistic about the economys future, and buying stocks, while others are pessimistic and buying bonds.

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Bond VS Stock

Attributes
Yield Analysis:

Bond
Nominal yield, Current yield, Yield to maturity, Yield curve, Bond duration, Bond convexity

Stock
Gordon model, Dividend yield, Income per share, Book value, Earnings yield, Beta coefficient

Derivatives:

Bond option, Credit derivative, Credit default swap, Collateralized debt obligation, Collateralized mortgage obligation

Credit derivative, Hybrid security, Options, Futures, Forwards, Swaps

Centralization:

Bonds markets, unlike stock or share markets, often do not have a centralized exchange or trading system

Stock or share markets, have a centralized exchange or trading system

Issued By:

Bonds issued by public sector authorities, credit institutions, companies & supranational institutions

Stock are issued by corporation or joint-stock companies

Meaning:

In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and is obliged to

In financial markets, stock capital raised by a corporation or jointstock company through the issuance

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Attributes

Bond
repay the principal and interest

Stock
and distribution of shares

No. of Types:

12 Types

4 Types

Holders:

Bond holders are in essence lenders to the issuer

The stock holders own a part of the issuing company an equity stake)

Kind:

Securities

Securities

Participants:

Investors, Speculators, Institutional Investors

Market maker, Floor trader, Floor broker

Conclusion
After discussing both international market of Bond and equity, we can conclude that bond market is less risky than stock market, but in stock market stock holder has ownership entity unlike as bond holder. But on the other hand risk is highly involved in equity market. But issuing a bond does increase the debt burden of the bond issuer because contractual interest payments must be paid unlike dividends, they cannot be reduced or suspended.

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References www.investopedia.com www.wikipedia.com International Market Articles and Research Paper

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