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Introduction:
The development of economy of any country depends mostly on the establishment of sound,
effective and efficient financial system in that country. A well-developed financial system
plays an important role in accelerating economic growth by mobilizing savings and
facilitating investment in an efficient manner. Bond is an instrument which plays a vital role
in economy. There are various types of bond products depending on provisions, maturities,
coupon rate, options, convertibility, etc. Bond Market in Bangladesh is dominated by treasury
debt securities. It has now only one corporate bond; but does not have any municipal
bond/debenture. The Taka Treasury bond market consists of primary issues of treasury bonds
of different maturities (2, 5, 10, 15 and 20 years), and secondary trade therein through
primary dealers. 20 banks performing as Primary Dealers participate directly in the primary
auctions. Other bank and non bank investors can participate in primary auctions and in
secondary trading through their nominated Primary Dealers. Non-resident individual and
institutional investors can also participate in primary and secondary market, but only in
treasury bonds. Bond market acts as buffer of equity market. This market in Bangladesh has
been found very inefficient with respect to number of issues, volume of trade, number of
participant, long-term yield curve, interest rate policy etc. The debt market being an integral
part of financial market plays a complementary role in developing economy through
allocation of funds to the different deficit sectors. The debt market consists of money market,
mortgage market, bond market and derivative market.
What is bond market?
The bond market is a financial market where participants buy and sell debt securities, usually
in the form of bonds. Bond Market is composed of Treasury bond, Municipal Bond and
Corporate Bond. This is of two kinds- Organized and OTC markets. There are various types
of bond products depending on provisions, maturities, coupon rate, options, convertibility,
etc. Bond Market in Bangladesh is dominated by treasury debt securities. The bond market
(also debt market or credit market) is a financial market where participants can issue new
debt, known as the primary market, or buy and sell debt securities, known as the secondary
market. This is usually in the form of bonds, but it may include notes, bills, and so on. Its
primary goal is to provide long-term funding for public and private expenditures.
The Buyer: The final players in the market are those who buy the debt that is being issued in
the market. They basically include every group mentioned as well as any other type of
investor, including the individual. Governments play one of the largest roles in the market
because they borrow and lend money to other governments and banks. Furthermore,
governments often purchase debt from other countries if they have excess reserves of that
country's money as a result of trade between countries.
The goal of bond market:
The primary goal of bond market is to take the money from saver and give it to the borrower
(Government , corporation etc.) like banks but the extra advantage it has is it offered directly
by the borrower(Government , corporation etc.) to the saver or investor. The bond market
serves both issuers and purchasers in unique ways. Issuers of bonds, like government bodies
or corporations, get immediate financing without having to take a loan from a traditional
lender. Purchasers of bonds, typically called investors, get to participate in the loan business
without having the capital required to fund large loans.
Bonds as borrowing instrument
Businesses, from small public companies to the government with its budget, all have a limit
to their finances. They will need loans to expand and reach into new areas. Large lenders
provide the vast majority of these loans, but all businesses reach a point where they would
rather set their own terms than work with lenders indefinitely. Bonds are issued according to
a business's own desires, such as limits and interest rates, and investors can either choose to
purchase them or leave them be, but investors cannot change these terms.
Bonds as Investments
Investors receive a great benefit from the stability of a bond investment. Making loans on
interest is a very stable and lucrative business, but it can require an extremely high amount of
capital in order to get started. When an investor buys a bond, the investor is issuing a small
part of a loan, making the lending business more manageable for the common person.
What kind of risk do investor face in bond market ?
There are many risk associate with bond it depend on the interest ret, inflation, provisions
stated in bond indenture and the economic strength of the issuer to payoff to the investor
Interest ret risk
The most common risk in the bond market is interest rate risk - the risk that bond prices will
fall as interest rates rise. By buying a bond, the bondholder has committed to receiving a
fixed rate of return for a fixed period. If interest rets falls the bond will then be trading at a
discount to reflect the lower return that an investor will make on the bond.
Reinvestment Risk
For the coupon bonds if interest re falls after purchasing the bond there is a reinvestment risk
of the coupon payments. The risk that the coupon payment from a bond will be reinvested at
a lower rate than the bond originally provided.
Call Risk
This risk is only for callable bonds. The risk that a bond will be called by its issuer. Callable
bonds have call provisions, which allow the bond issuer to purchase the bond back from the
bondholders and retire the issue. This is usually done when interest rates have fallen
substantially since the issue date.
Default Risk
The risk that the bond's issuer will be unable to pay the contractual interest or principal on the
bond in a timely manner, or at all. Government bonds dont have this risk because
governments can raise taxes or print money to pay debts, making default unlikely. However,
small, emerging companies have this kind of risk very high. They are much more likely to
default on their bond payments, in which case bondholders will likely lose all or most of their
investment.
Inflation Risk
The risk that the rate of price increases in the economy deteriorates the returns associated
with the bond. This has the greatest effect on fixed bonds, which have a set interest rate from
inception. For example, if an investor purchases a 5% fixed bond and then inflation rises to
10% a year, the bondholder will lose money on the investment because the purchasing power
of the proceeds has been greatly diminished. The interest rates of floating-rate bonds
(floaters) are adjusted periodically to match inflation rates, limiting investors' exposure to
inflation risk.
Bond Market Maturities: Bonds dont live forever. Each of them has an expiration date, or
maturity, at which time the bond issuer must return the principal to an investor. Some bonds
have a very short life span. Others last for decades. As a rule of thumb, bonds that mature in
less than five years are called short bonds. Those that mature in five to 12 years are called
intermediate bonds. Long bonds have maturities of 12 years or more. Higher the maturity
provides higher the interest rate. Because a long term bond carries greater risk that higher
inflation could reduce the value of payments as well as greater risk that higher overall interest
rates could cause the bond's price to fall.
Depth and Breadth of the Bond Market: I am sorry to say that I cant fine any answer
of this question.
Bond Market instruments:
Traditional CD
Bump-Up CD
Liquid CD
Zero-coupon CD
Callable CD
Brokered CD
Serial no.
Securities
Year of issue
Features
1988
20%
Convertible
2
3
4
1989
1992
1993
5
6
7
8
1994
1994
9
10
1995
1995
11
12
1995
1996
13
1998
14
1999
15
16
17
2011
1993
1994
2007
2010
20%
Convertible
20%
Convertible
10%
Convertible
20%
Convertible
20%
Convertible
20%
Convertible
Size(BDT
million)
40
60
45
20
375
240
120
800
250
40
300
150
110
20
Profit Sharing
20%
Convertible
25%
Convertible
3,000
1,070
3,000
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