Chapter 8 - Bond markets. Chapter 7 discussed money market instruments that have minimal credit risk. These instruments are reasonably homogeneous and are issued and held by economic units as a means to adjust liquidity. This chapter, in contrast, discusses capital market instruments whose terms, conditions, and risk vary substantially. | Power Point Slides for: Financial Institutions, Markets, and Money, 9th Edition Authors: Kidwell, Blackwell, Whidbee & Peterson Prepared by: Babu G. Baradwaj, Towson University and Lanny R. Martindale, Texas A&M University CHAPTER 8 BOND MARKETS Capital Markets Economic purpose - brings together long-term (over 1 year) borrowers and long-term investors. Major Issuers (borrowers) Households - mortgages. Business - bonds and stock Governments - federal, state, and local bonds. Major Investors Households (directly or indirectly through financial intermediaries). Foreign investors. Economic Sectors Capital Market Instruments Outstanding Types of Capital Market Claims Corporate stock - studied in Chapter 9 Bonds - studied here in Chapter 8 Mortgages - studied in Chapter 10 . Treasury and Agency Securities . Government Issues - Notes and Bonds Coupon issues. Notes - one to ten-year maturity. Bonds - over ten-year maturity. Sold by auction by the Federal Reserve banks. Trend is toward more money market financing and less capital market financing – 30-year T-bond issues discontinued. How to Read Treasury Quotes . Treasury and Agency Securities (continued) Inflation-Indexed Notes and Bonds (TIPS) – see example on p. 206. Principal adjusts for inflation Fixed coupon rate determined by auction process Minimum denomination is $1,000. Separate Trading of Registered Interest and Principal (STRIPS). Securitized . Treasury note or bond Interest and principal zero coupon securities sold based on interest and principal cash flows of underlying bond. Market values total value of STRIPS created more than underlying bonds. State and Local Government Bonds Known as municipal bonds or munis Types of Municipal Bonds General Obligation (GO) - backed by taxing power of political entity. Revenue - financed and paid back with cash flows from a specific project. Industrial Development Bonds (IDB) - public financing of private business. Municipal | Power Point Slides for: Financial Institutions, Markets, and Money, 9th Edition Authors: Kidwell, Blackwell, Whidbee & Peterson Prepared by: Babu G. Baradwaj, Towson University and Lanny R. Martindale, Texas A&M University CHAPTER 8 BOND MARKETS Capital Markets Economic purpose - brings together long-term (over 1 year) borrowers and long-term investors. Major Issuers (borrowers) Households - mortgages. Business - bonds and stock Governments - federal, state, and local bonds. Major Investors Households (directly or indirectly through financial intermediaries). Foreign investors. Economic Sectors Capital Market Instruments Outstanding Types of Capital Market Claims Corporate stock - studied in Chapter 9 Bonds - studied here in Chapter 8 Mortgages - studied in Chapter 10 . Treasury and Agency Securities . Government Issues - Notes and Bonds Coupon issues. Notes - one to ten-year maturity. Bonds - over ten-year maturity. Sold by auction by the Federal Reserve .
