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Lecture Financial markets and institutions - Chapter 7: Bond markets

This chapter presents the following content: Background on bonds, treasury and federal agency bonds, municipal bonds, corporate bonds, institutional use of bond markets, globalization of bond markets. | Chapter 7 Bond Markets Financial Markets and Institutions, 7e, Jeff Madura Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Chapter Outline Background on bonds Treasury and federal agency bonds Municipal bonds Corporate bonds Institutional use of bond markets Globalization of bond markets Background on Bonds Bonds represents long-term debt securities that are issued by government agencies or corporations Interest payments occur annually or semiannually Par value is repaid at maturity Most bonds have maturities between 10 and 30 years Bearer bonds require the owner to clip coupons attached to the bonds Registered bonds require the issuer to maintain records of who owns the bond and automatically send coupon payments to the owners Background on Bonds (cont’d) Bond yields The issuer’s cost of financing is measured by the yield to maturity The annualized yield that is paid by the issuer over the life of the bond Equates the future coupon and principal payments to the initial proceeds received Does not include transaction costs associated with issuing the bond Earned by an investor who invests in a bond when it is issued and holds it until maturity The holding period return is used by investors who do not hold a bond to maturity Treasury and Federal Agency Bonds The U.S. Treasury issues Treasury notes or bonds to finance federal government expenditures Note maturities are usually less than 10 years Bonds maturities are 10 years or more An active secondary market exists The 30-year bond was discontinued in October 2001 Treasury and Federal Agency Bonds (cont’d) Treasury bond auction Normally held in the middle of each quarter Financial institutions submit bids for their own accounts or for clients Bids can be competitive or noncompetitive Competitive bids specify a price the bidder is willing to pay and a dollar amount of securities to be purchased Noncompetitive bids specify only a dollar amount of securities to be . | Chapter 7 Bond Markets Financial Markets and Institutions, 7e, Jeff Madura Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Chapter Outline Background on bonds Treasury and federal agency bonds Municipal bonds Corporate bonds Institutional use of bond markets Globalization of bond markets Background on Bonds Bonds represents long-term debt securities that are issued by government agencies or corporations Interest payments occur annually or semiannually Par value is repaid at maturity Most bonds have maturities between 10 and 30 years Bearer bonds require the owner to clip coupons attached to the bonds Registered bonds require the issuer to maintain records of who owns the bond and automatically send coupon payments to the owners Background on Bonds (cont’d) Bond yields The issuer’s cost of financing is measured by the yield to maturity The annualized yield that is paid by the issuer over the life of the bond Equates the future coupon and .