1. 1 CHAPTER 7 Bond Markets

2. 2 CHAPTER 7 OVERVIEW This chapter will: A. Provide a background on bonds B. Explain how bond markets are used by institutional investors C. Explain how bond markets become globally integrated

3. 3 A. Background on Bonds 1. Bond Yields: Two Components a. A set of coupon (interest) payments b. The difference between the par value and versus the price when bond was sold.

4. 4 A. Background on Bonds 2. Treasury and Federal Agency Bonds 3. Trading Treasury Bonds 4. Treasury Bond Quotations

5. 5 A. Background on Bonds 5. Stripped Treasury Bonds 6. Inflation-Indexed Treasury Bonds 7. Savings Bonds 8. Federal Agency Bonds

6. 6 A. Background on Bonds 9. MUNICIPAL BONDS a. Municipal Bonds Credit Risk b. Characteristics of Municipal Bonds 1. ) Variable-Rate Municipal Bonds 2.) Tax Advantages c. Trading and Quotations d. Yields offered on Municipal Bonds 1. ) Yield Curve on Municipal Bonds

7. 7 A. Background on Bonds 10. Corporate Bonds a. Corporate Bond Yields and Risk 1. ) Yield Curve 2.) Default Rate 3.) Investor Assessment of Risk 4.) Bond Ratings b. Private Placements of Corporate Bonds

8. 8 A. Background on Bonds c. Characteristics of Corporate Bonds 1. ) Sinking-Fund Provision 2.) Protective Covenants 3.) Call Provisions 4.) Bond Collateral 5.) Low- and Zero-Coupon Bonds 6.) Variable-Rate Bonds 7.) Convertibility

9. 9 A. Background on Bonds d. Trading Corporate Bonds 1.) Types of Orders 2.) Trading Online e. Corporate Bond Quotations

10. 10 A. Background on Bonds 11. Junk Bonds a. Size of the Junk Bond Market b. Participation in the Junk Bond Market c. Risk Premium of Junk Bonds d. Performance of Junk Bonds e. Contagion Effects in the Junk Bond Market

11. 11 A. Background on Bonds 12. How Corporate Bonds Facilitate Restructuring a. Using Bonds to Finance a Leveraged Buyout b. Using Bonds to Revise the Capital Structure

12. 12 B. Institutional Use of Bond Markets 1. Participation of Financial Institutions in the Bond Markets by a. Commercial banks b.Finance companies c.Mutual funds d. Brokerage firms e. Investment banking firms f. Insurance companies g.Pension funds

13. 13 C. Globalization of Bond Markets 1. Foreign bond markets a. Commonly used by U.S. financial institutions b. Offer continuous around-the-clock trading c. Development led by sovereign bonds

14. 14 C. Globalization of Bond Markets 2. Eurobond Market a. Denominated in eurocurrencies b. U.S. dollar most common currency c. Often offers lower financing rates