VIVEKANAND COLLEGE FOR BBA

An
Assignment
Of
Stock Exchange & Portfolio Management

TOPIC: - INTERNATIONAL BOND MARKET

SUBMITTED BY: -
ROLL.NO:-
SORATHIYA ASHISH L. [79]

SUBMITTED TO:-
MS. KHUSHBU VORA

VIVEKANAND COLLEGE FOR B.B.A.

T.Y.B.B.A {6TH SEM}
FINANCE
2009-2010

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 What is “BOND”?
In finance, a bond is a debt security, in which the authorized
issuer owes the holders a debt and, depending on the terms of the bond, is obliged
to pay interest and/or to repay the principal at a later date, termed maturity.
A bond is a formal contract to repay borrowed money with
interest at fixed intervals.

 What is “BOND MARKET”?

The bond market (also known as the debt, credit, or fixed

income market) is a financial market where participants buy and sell debt securities,
usually in the form of bonds.
As of 2009, the size of the worldwide bond market (total debt
outstanding) is an estimated $82.2 trillion of which the size of the outstanding U.S.
bond market debt was $31.2 trillion according to BIS (or alternatively $34.3 trillion
according to SIFMA) (Securities Industry and Financial Markets Association).

 BOND MARKET:
There are three types of Bonds.
1. Domestic Bonds
2. Foreign Bonds
3. International Bonds

{1.} Domestic Bonds:

Issued locally by a domestic borrower usually in local denomination.

For Example:

Amoco Canada issues a bond in Canada for placement in the Canadian domestic
market, i.e., with investors resident in Canada.
The issue is underwritten by a syndicate of Canadian securities houses.
The issue is denominated in the currency of the intended investors, i.e., CAD.

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{2.} Foreign Bonds:

Issued on local markets by a foreign borrower and usually

denominated in local currency. Expanding the pool of potential investors, many
borrowers issue bonds in foreign markets. These bonds are in the local
denomination of that foreign market and subject to the laws and regulations of the
local market authorities. There is no direct exchange rate exposure.

For Example:

Amoco Canada, a foreign corporation, issues bonds in the U.S. for placement in the
U.S. market alone.
The issue is underwritten by a syndicate of U.S. securities houses.
The issue is denominated in the currency of the intended investors, i.e., USD.

{3.} International Bonds:

Underwritten by a multinational syndicate of banks and usually

placed in countries other than the ones whose currency the bond denominates.

For Example:

Amoco Canada, a foreign corporation, issues bonds, in a major international

financial center, to be placed internationally.
The issue is underwritten by an international syndicate of securities houses.
The issue is denominated in any currency, including even the currency of the
borrower's country of incorporation, i.e., CAD.

International BOND MARKET

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The international bond market, also known as the global bond market, is
similar to the stock market. The major difference is instead of trading stocks,
investors trade what is known as debt securities, usually in the form of bonds. The
international bond market trades bonds over electronic trading networks. There is no
physical location for investors to gather, such as the stock market's New York Stock
Exchange. All transactions are conducted over the counter by internet or by phone.
A few corporate bonds are actually listed on an exchange system.

International Bond Market is very big and has an estimated size of nearly
$47 trillion. The size of the US bond market is the largest in the world. The US bond
market's outstanding debt is more than $25 trillion.

The International Bond Market has grown double in size since the year 2000.
By the end of the year 2006 it has been recorded that nearly $10 trillion of the bonds
were outstanding as far as International Capital Market Association data are
concerned. This rapid growth of the International Bond Market is due to the bonds
that are issued by the various multi national companies.

In International Bond Market, markets which are looked after by the

government of a particular country are actually taken into account. These markets
are big in size, there is liquidity in the market. These markets lack credit risk which
make them sensitive to the interest rates.

The international bond market allows investors to choose between low risk
and high risk investments. This allows a diverse portfolio and a wide range of
investment returns. Because all transactions are done electronically, the international
bond market is very convenient for investors.

International bond market is separated into the primary bond market and the
secondary bond market. The primary market is where bonds are sold by the original
issuer to private individuals. The secondary market is for investors to sell their bonds
to a second investor or financial institution.

1. Primary market bond market:

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The primary market is that part of the capital markets that deals with the
issuance of new securities. Companies, governments or public sector institutions can
obtain funding through the sale of a new stock or bond issue. This is typically done
through a syndicate of securities dealers. The process of selling new issues to
investors is called underwriting. In the case of a new stock issue, this sale is an initial
public offering (IPO). Dealers earn a commission that is built into the price of the
security offering, though it can be found in the prospectus.

2. Secondary market bond market:

The secondary market, also known as the aftermarket, is the financial

market where previously issued securities and financial instruments such as stock,
bonds, options, and futures are bought and sold.

The term "secondary market" is also used to refer to the market for any
used goods or assets, or an alternative use for an existing product or asset where
the customer base is the second market.

Bonds are generally low risk but that is only for people who buy the
bond and hold onto it until it matures. The international bond market is risky because
when investors sell their bonds before maturity, they are at the mercy of fluctuating
interest rates. When interest rates increase, the value of a bond decreases. When
interest rates decrease, the bond gains in value. Since interests rates are part of a
nation's economy, it makes the international bond market very volatile for traders and
investors. But as long as investors deal in the primary market and hold onto their
bonds for the duration of their term, the risk is much lower.

Types of bond markets

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The Securities Industry and Financial Markets Association (SIFMA) classifies

the broader bond market into five specific bond markets.

 Corporate Bond Market

 Government Bond Market
 Municipal Bond Market
 Mortgage backed and collateralized debt obligation Bond Market
 Funding Bond Market

{1} Corporate Bond Market:

A corporate bond is a bond issued by a corporation. It is a bond that a

corporation issues to raise money in order to expand its business.

The term is usually applied to longer-term debt instruments, generally with a

maturity date falling at least a year after their issue date. (The term "commercial
paper" is sometimes used for instruments with a shorter maturity.)

Sometimes, the term "corporate bonds" is used to include all bonds except
those issued by governments in their own currencies.

Some corporate bonds have an embedded call option that allows the issuer to
redeem the debt before its maturity date. Other bonds, known as convertible bonds,
allow investors to convert the bond into equity.

{2} Government Bond Market:

A bond is a debt investment in which an investor loans a certain amount of

money, for a certain amount of time, with a certain interest rate, to a company.
A government bond is a bond issued by a national government denominated in the
country's own currency. Bonds issued by national governments in foreign currencies
are normally referred to as sovereign bonds.

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The first ever government bond was issued by the English government in
1693 to raise money to fund a war against France. It was in the form of a tontine.

Risk-Government bonds are usually referred to as risk-free bonds, because

the government can raise taxes to redeem the bond at maturity.

Some counter examples do exist where a government has defaulted on its

domestic currency debt, such as Russia in 1998 (the "Ruble crisis"), though this is
very rare. As an example, in the US, Treasury securities are denominated in US
dollars.

In this instance, the term "risk-free" means free of credit risk. However, other
risks still exist, such as currency risk for foreign investors (for example non-US
investors of US Treasury securities would have received lower returns in 2004
because the value of the US dollar declined against most other currencies).
Secondly, there is inflation risk, in that the principal repaid at maturity will have less
purchasing power than anticipated if the inflation outturn is higher than expected.
Many governments issue inflation-indexed bonds, which should protect investors
against inflation risk.

{3} Municipal Bond Market:

A municipal bond is a bond issued by a city or other local

government, or their agencies. Potential issuers of municipal bonds include cities,
counties, redevelopment agencies, special-purpose districts, school districts, publicly
owned airports and seaports, and any other governmental entity (or group of
governments) below the state level. Municipal bonds may be general obligations of
the issuer or secured by specified revenues. Interest income received by holders of
municipal bonds is often exempt from the federal income tax and from the income
tax of the state in which they are issued, although municipal bonds issued for certain
purposes may not be tax exempt.

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{4} Mortgage backed and collateralized debt obligation

Bond Market

A mortgage-backed security (MBS) is an asset-backed security or debt

obligation that represents a claim on the cash flows from mortgage loans, most
commonly on residential property.

First, mortgage loans are purchased from banks, mortgage companies, and
other originators. Then, these loans are assembled into pools. This is done by
government agencies, government-sponsored enterprises, and private entities,
which may guarantee (securitize) them against risk of default associated with these
mortgages. Mortgage-backed securities represent claims on the principal and
payments on the loans in the pool, through a process known as Securitization.
These securities are usually sold as bonds, but financial innovation has created a
variety of securities that derive their ultimate value from mortgage pools.

Residential mortgages in the United States have the option to pay more than
the required monthly payment (curtailment) or to pay off the loan in its entirety
(prepayment). Because curtailment and prepayment affect the remaining loan
principal, the monthly cash flow of an MBS is not known in advance, and therefore
presents an additional risk to MBS investors.

Commercial mortgage-backed securities (CMBS) are secured by commercial

and multifamily properties (such as apartment buildings, retail or office properties,
hotels, schools, industrial properties and other commercial sites). The properties of
these loans vary, with longer-term loans (5 years or longer) often being at fixed
interest rates and having restrictions on prepayment, while shorter-term loans (1–3
years) are usually at variable rates and freely pre-payable

 Collateralized debt obligation:

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Collateralized debt obligations (CDOs) are a type of structured asset-

backed security (ABS) whose value and payments are derived from a portfolio of
fixed-income underlying assets. CDOs securities are split into different risk classes,
or tranches, whereby "senior" tranches are considered the safest securities. Interest
and principal payments are made in order of seniority, so that junior tranches offer
higher coupon payments (and interest rates) or lower prices to compensate for
additional default risk.

A few academics, analysts and investors such as Warren Buffett and the
IMF's former chief economist Raghuram Rajan warned that CDOs, other ABSs and
other derivatives spread risk and uncertainty about the value of the underlying assets
more widely, rather than reduce risk through diversification. Following the onset of
the 2007-2008 credit crunch, this view has gained substantial credibility. Credit rating
agencies failed to adequately account for large risks (like a nationwide collapse of
housing values) when rating CDOs and other ABSs.

Many CDOs are valued on a mark to market basis and thus have experienced
substantial write-downs on the balance sheet as their market value has collapsed.

{5} Funding Bond Market:

Bond issue for collecting fund for expansion of business.

From money markets, to exchange-traded funds and unit-investment trusts, there's a
fund for every need.

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 Redeemable bond:
A bond which the issuer has the right to redeem prior to its
maturity date, under certain conditions.
When issued, the bond will explain when it can be redeemed
and what the price will be. In most cases, the price will be slightly above the par
value for the bond and will increase the earlier the bond is called. A firm will often call
a bond if it is paying a higher coupon than the current market interest rates.
Basically, the firm can reissue the same bonds at a lower interest rate, saving them
some amount on all the coupon payments; this process is called ""refunding.""

 Irredeemable bond:
Bonds with a fixed maturity but not subject to prior redemption; bonds that
cannot be called for redemption by the issuer (payer or obligor) before maturity.

They should not be confused with perpetual bonds or intermediate bonds.

UK Irredeemable (undated) bonds have no final maturity date. They are callable by
the government at any time within 3 months. As their coupons range between 2.5%
and 4% they are unlikely to be called. War loan, issued by the UK government during
the First World War, is the best known undated gilt.

 Convertible bond:

A convertible bond (or, if it has a maturity of greater than 10 years, a

convertible debenture) is a type of bond that the holder can convert into shares of
common stock in the issuing company or cash of equal value, at an agreed-upon
price.

It is a hybrid security with debt- and equity-like features. Although it typically

has a low coupon rate, the instrument carries additional value through the option to
convert the bond to stock, and thereby participate in further growth in the company's
equity value. The investor receives the potential upside of conversion into equity
while protecting downside with cash flow from the coupon payments.

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Bond market participants

Bond market participants are similar to participants in most financial markets
and are essentially either buyers (debt issuer) of funds or sellers (institution) of funds
and often both.

Participants include:

1. Institutional investors
2. Governments
3. Traders
4. Individuals

Because of the specificity of individual bond issues, and the lack of liquidity in
many smaller issues, the majority of outstanding bonds are held by institutions like
pension funds, banks and mutual funds. In the United States, approximately 10% of
the market is currently held by private individuals.

{1} Institutional investors:

Institutional investors are organizations which pool large

sums of money and invest those sums in companies.

They include banks, insurance companies, retirement or

pension funds, hedge funds and mutual funds. Their role in the economy is to act as
highly specialized investors on behalf of others.

For instance, an ordinary person will have a pension from his

employer. The employer gives that person's pension contributions to a fund. The
fund will buy shares in a company, or some other financial product. Funds are useful
because they will hold a broad portfolio of investments in many companies. This
spreads risk, so if one company fails, it will be only a small part of the whole fund's
investment. Institutional investors will have a lot of influence in the management of
corporations because they will be entitled to exercise the voting rights in a company.
They can engage in active role in corporate governance. Furthermore, because
institutional investors have the freedom to buy and sell shares, they can play a large

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part in which companies stay solvent, and which go under. Influencing the conduct of
listed companies, and providing them with capital are all part of the job of investment
management.

{2} Governments:

Government can also play a important role in bond market. A government

bond is a bond issued by a national government denominated in the country's own
currency. Bonds issued by national governments in foreign currencies are normally
referred to as sovereign bonds. The first ever government bond was issued by the
English government in 1693 to raise money to fund a war against France. It was in
the form of a tontine.

{3}Traders:

In finance, a trader is someone who buys and sells financial instruments such
as stocks, bonds and derivatives. A broker who simply fills buy or sell orders is not a
trader, as they are merely executing instructions given to them.

Traders are either professionals working in a financial institution or a

corporation, or individual investors, or day traders. They buy and sell financial
instruments traded in the stock markets, derivatives markets and commodity
markets, comprising the stock exchanges, derivatives exchanges and the
commodities exchanges.

Bond market size

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Amounts outstanding on the global bond market increased 6% in 2008 to $83

trillion. Domestic bonds accounted for 71% of this and international bonds the
remainder. Domestic bond market stocks increased 7% during the year, largely due
to an increase in government bonds. The US was the largest market for domestic
bonds in 2008 accounting for 43% of amounts outstanding followed by Japan with
16%. A quarter of amounts outstanding in the US were in mortgage backed bonds, a
fifth in corporate debt and 18% in Treasury bonds with most of the remainder in
Federal Agency securities and municipal bonds. In Europe, public sector debt is
substantial in Italy (103% of GDP), Germany (61%), and France (58%) with
government borrowing set to increase in the next few years. International bond
issuance decrease 19% in 2008 with international mortgage-backed bond issuance
hitting record levels. The UK overtook the US in 2008 to become the leading centre
globally for amounts issued with 30% of the global total. Amounts outstanding on the
international bond market increased 5% in 2008 to $23.9 trillion

Bond investments

Investment companies allow individual investors the ability to participate in the

bond markets through bond funds, closed-end funds and unit-investment trusts.
In 2006 total bond fund net inflows increased 97% from $30.8 billion in 2005 to $60.8
billion in 2006.Exchange-traded funds (ETFs) are another alternative to trading or
investing directly in a bond issue. These securities allow individual investors the
ability to overcome large initial and incremental trading sizes.

Bond indices

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A number of bond indices exist for the purposes of managing portfolios and
measuring performance, similar to the S&P 500 or Russell Indexes for stocks. The
most common American benchmarks are the Barclays Aggregate, Citigroup BIG and
Merrill Lynch Domestic Master. Most indices are parts of families of broader indices
that can be used to measure global bond portfolios, or may be further subdivided by
maturity and/or sector for managing specialized portfolios.

Bond Market vs. Stock Market

Many people think that the bond market and the stock market is one and the
same. In fact, many people who invest in bond market and the stock market either
with their own personal investment account or retirement plans also cannot tell the
difference between the two. Although, most people have a general idea that stock
market is associated with risk while bonds offer relatively more safety.         

 Bond market vs. stock market is a crucial differentiating factor as both

markets can earn you money but they are different in terms of the potential risks and
rewards. Let us try and understand the difference between the bond market and the
stock market.

          When you buy a share of stock, you actually end up taking the ownership in
the company whose stock you are investing in. This means that you will end up
sharing the profits as well as the losses incurred by the company in the years to
come. If a company’s revenue decreases, it would ultimately affect the stock price of
that company leading to a decline in the stock price. However, if the company’s
revenue increases, the stock price would go up because the company is generating
more profits.

         On the other hand, a bond does not allow you ownership in a company. If a
company wants to raise money without dividing itself, they can decide to sell bonds
instead of issuing stocks. So, when you buy a bond of a company, you become more
like a creditor than an owner in the company, and you are paid back over the life of
the bond. As a bondholder, you will earn a return on your money, which is a fixed
percentage, and this return is paid annually. So, if a bond is for 10 years, you will get

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interest for each of those 10 years and then your principal amount (the amount you
invested) is returned to you at the time of expiration of the bond.

          In the short term, you have greater chances of losing money in the stock
market than the bond market. However, in order to figure out which is a better
investment opportunity, you should study your risk tolerance along with the kind of
returns you are looking for and according make the choice of investing either in the
bond market or the stock market.

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Amounts of Domestic and International Bonds Outstanding

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 Currency Distribution of International Bond

Amounts Outstanding

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