The Bond Market is a financial market that acts as a platform for the buying and selling of debt securities. The bond market is a part of the capital market serving platform to collect fund for the public sector companies, governments, and corporations. There are a number of bond indices that reflect the performance of a bond market.
The bond market can also be called the 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 is a lack of liquidity in the bonds. This is the reason that most of the bonds are held by institutions like banks, mutual funds, and pension funds. Bond markets are generally decentralized, and unlike stocks and futures, there exists no common exchange for the bond market. The bond market is less volatile in nature than the stock market, and thus investors purchase the bond coupon and holds it until it matures. 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 are inversely proportional to one another.
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 bond listings, and they are a tool to mirror the performance of a particular security. Bond indices may vary with the type of the bonds.