Bond market is a financial market that plays a platform to buy and sell the debt securities. Bond market is a part of the capital market serving platform to collect fund for the public sector companies, governments and corporations. There exist a number of bond indices that reflect the performance of a bond market.
The bond market is also termed as debt market, credit market or fixed income market.
The size of the current international bond market is estimated to be $45 trillion. The major bond market participants are - Governments, institutional investors, traders and individual investors. According to the specifications given by the Bond Market Association, there are five types of bond markets. They are:
Corporate Bond Market
Municipal Bond Market
Government and Agency Bond Market
Funding Bond Market
Mortgage Backed and Collateralized Debt Obligation Bond Market
The bonds are usually specific to individual issues and there exists a lack of liquidity in the bonds. This is the reason that most of the bonds are held by the institutions like banks, mutual funds and pension funds. Bond markets are generally decentralized. Unlike stocks and futures, there exists no common exchange for the bond market. The bond market is less volatile in nature. The investors purchase the bond coupon and holds it until it gets matured. As risk associated with bond investment is less, the return received is also less.
There are some risks that the bond investors have to face. The change in interest rate is the major risk that occurs in bond investment. The interest rate and value of bond is inversely proportional to each other.
When the rate of interest increases, the bond value falls considerably as the new issues pay a higher yield. Conversely, when the interest rate decreases, the bond value rises. The interest rate fluctuation may depend on the volatility of the bond market and also on the monetary policy of the country
The bond market indices consist of a bond listing. It is a tool to mirror the performance of a particular security. The bond indices may vary with the type of the bonds.
There are different indices for government bonds, high-yield bonds, corporate bonds and mortgage-backed securities.