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Lecture Financial markets and institutions: Chapter 6 - Anthony Saunders, Marcia Millon Cornett

Chapter 6 - Bond markets. This chapter looked at the domestic and international bond markets. We defined and discussed the three types of bonds available to long-term debt investors: Treasury notes and bonds, municipal bonds, and corporate bonds. | Chapter Six Bond Markets 6- Bond and Bond Markets Capital markets involve equity and debt instruments with maturities of more than one year Bonds are long-term debt obligations issued by corporations and government units Bond markets are markets in which bonds are issued and traded Treasury notes (T-notes) and bonds (T-bonds) Municipal bonds (Munis) Corporate bonds 6- Bond Market Instruments Outstanding, 1994-2007 6- Treasury Notes and Bonds Treasury notes and bonds (T-notes and T-bonds) are issued by the U.S. Treasury to finance the national debt and other government expenditures The annual federal deficit is equal to annual expenditures (G) less taxes (T) received The national debt (ND) is the sum of historical annual federal deficits: 6- Treasury Notes and Bonds Default risk free: backed by the full faith and credit of the U.S. government Low returns: low interest rates (yields to maturity) reflect low default risk Interest rate risk: because of their long maturity, T-notes and T-bonds experience wider price fluctuations than money market securities when interest rates change Liquidity risk: older issued T-bonds and T-notes trade less frequently than newly issued T-bonds and T-notes 6- Treasury Notes and Bonds T-notes have original maturities from over 1 to 10 years T-bonds have original maturities from over 10 years Issued in minimum denominations (multiples) of $1,000 May be either fixed principal or inflation-indexed inflation-indexed bonds are called Treasury Inflation Protection Securities (TIPS) the principal value of TIPS is adjusted by the percentage change in the Consumer Price Index (CPI) every six months Trade in very active secondary markets Prices are quoted as percentages of face value, in 32nds 6- Treasury STRIPS Separate Trading of Registered Interest and Principal Securities (STRIPS), a.k.a. Treasury zero bonds or Treasury zero-coupon bonds Financial institutions and government securities brokers and dealers create STRIPS | Chapter Six Bond Markets 6- Bond and Bond Markets Capital markets involve equity and debt instruments with maturities of more than one year Bonds are long-term debt obligations issued by corporations and government units Bond markets are markets in which bonds are issued and traded Treasury notes (T-notes) and bonds (T-bonds) Municipal bonds (Munis) Corporate bonds 6- Bond Market Instruments Outstanding, 1994-2007 6- Treasury Notes and Bonds Treasury notes and bonds (T-notes and T-bonds) are issued by the U.S. Treasury to finance the national debt and other government expenditures The annual federal deficit is equal to annual expenditures (G) less taxes (T) received The national debt (ND) is the sum of historical annual federal deficits: 6- Treasury Notes and Bonds Default risk free: backed by the full faith and credit of the U.S. government Low returns: low interest rates (yields to maturity) reflect low default risk Interest rate risk: because of their long maturity,