We learned that there are various types of bonds in the market, and the government or...

We learned that there are various types of bonds in the market, and the government or corporates use them to finance their budget, spread out the risk, or just establish safe cash streams. However, instead of just using one simple bond for their purposes, why starkly different bonds types exist in the market? Why do we need these heterogeneous bonds in the real world? Please explain your argument with specific examples, factors, or numerical illustrations as we usually did.

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Expert Solution

Bond: A bond is a debt instrument which pay outs period income in the form of interest to the investors. Government/ corporates issue the bonds as a means of issuing/raising capital. if a bonds are issued and capital is raised governemnt/corporate is obiliged to pay the interest payments to marginal investros periodically.

government issue bonds in the form of t-bills which tenure differs from 91 day t-bill, 182, 364 etc. bonds which tenure varies from 1 day to 364 days are sold as the money market instrument which are raised for the purpose of short time and the interest ;rovided for the shortterm funds are less compared to the long term bonds.

based on the lock in period investors will invest in the different set of bonds like t-bills, corporate bonds, commericial papers, fixed deposits, recurrig deposits. all these asset classes have different tenure and different interest payouts.

the relationship between tenure and interest payouts are in direct in nature but long tenure bonds comes with the risks associated like interest rate risk, inflation risk, re investment risk etc.

jeff jeffy answered 2 years ago

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