Question

Discuss the bond market - liquidity, maturity, international, denomination...

Answer 1

So bond market is basically where buying and selling of bonds i.e. instruments yielding fixed income. This is bond market explained in very basic terms. We will elaborate on the terms Liquidity, Maturity, Denomination etc.

Liquidity - So in the bond market there are two types of securities primarily. One is the Government bonds i.e. bonds issued by the central government. The other type is the corporate bonds i.e. bonds issued by the corporate/companies. Liquidity means that there is enough volume for both buying and selling and the bond is actively traded. This means that if i want to liquidate my bond holdings for cash, i can do so immediately and there is a buyer for my bonds. Similarly when i want to buy bonds there is a seller available. This is called liquidity.

Maturity - So every bond has a maturity date wherein the company/government will pay back the principal amount to the bond holder. Here there are two kind of bonds i.e. one which do not pay interest and one which pay interest. In case of the former the government/company has to give back the bond maturity value with the accrued interest. In case of the latter they have to give back only the principal amount as the interest has been paid periodically as predefined.

International - The bond market is accessible to the international community. In this case a particular foreign entity can buy and sell bonds in the foreign country where it does not belong. This varies from country to country. Generally foreign investors take advantage of countries where there is higher interest rate in the bonds and also a good level of safety. These foreign entities avoid investing in countries where there is a higher chance of default by the companies present there or the government is not stable.

Denomination - Denomination of the bond is very important. A bond may vary from par value from $ 50 to $1000 etc depending on the type of bond. It may have different par values as well. There is no fixed regulation by generally it can be seen that bonds trade in the par value of $100s and in the multiples. More or less the denominations across are kept same for ease of bond portfolio construction and trade.