Thị trường tài chính và các định chế tài chính_ Chapter 07

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Chapter 7
Bond Markets
Financial Markets and Institutions, 7e, Jeff Madura
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
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Chapter Outline

Background on bonds

Treasury and federal agency bonds

Municipal bonds

Corporate bonds

Institutional use of bond markets

Globalization of bond markets
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Background on Bonds

Bonds represents long-term debt securities that are
issued by government agencies or corporations

Interest payments occur annually or semiannually

Par value is repaid at maturity

Most bonds have maturities between 10 and 30 years


Bearer bonds require the owner to clip coupons attached
to the bonds

Registered bonds require the issuer to maintain records
of who owns the bond and automatically send coupon
payments to the owners
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Background on Bonds (cont’d)

Bond yields

The issuer’s cost of financing is measured by the yield to
maturity

The annualized yield that is paid by the issuer over the life of the
bond

Equates the future coupon and principal payments to the initial
proceeds received

Does not include transaction costs associated with issuing the bond

Earned by an investor who invests in a bond when it is issued and
holds it until maturity

The holding period return is used by investors who do not hold a
bond to maturity
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Treasury and Federal Agency

Bonds

The U.S. Treasury issues Treasury notes
or bonds to finance federal government
expenditures

Note maturities are usually less than 10 years

Bonds maturities are 10 years or more

An active secondary market exists

The 30-year bond was discontinued in
October 2001
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Treasury and Federal Agency
Bonds (cont’d)

Treasury bond auction

Normally held in the middle of each quarter

Financial institutions submit bids for their own accounts
or for clients

Bids can be competitive or noncompetitive

Competitive bids specify a price the bidder is willing to pay
and a dollar amount of securities to be purchased


Noncompetitive bids specify only a dollar amount of securities
to be purchased
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Treasury and Federal Agency
Bonds (cont’d)

Treasury bond auction (cont’d)

The Salomon Brothers scandal

In a 1990 bond auction, Salomon Brothers purchased 65
percent of the bonds issued (exceeding the 35 percent
maximum)

Salomon resold the bonds at higher prices to other institutions

In August of 1991, the Treasury Department temporarily
barred Salomon Brothers from bidding on Treasury securities

In May 1992 Salomon paid fines of $190 million to the SEC
and Justice Department

Salomon created a reserve fund of $100 million to cover
claims from civil lawsuits
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Treasury and Federal Agency
Bonds (cont’d)

Trading Treasury bonds


Bond dealers serve as intermediaries in the secondary
market and also take positions in the bonds

30 primary dealers dominate the trading

Profit from the bid-ask spread

Conduct trading with the Fed during open market operations

Typical daily volume is about $200 billion

Online trading

TreasuryDirect program ()
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Treasury and Federal Agency
Bonds (cont’d)

Treasury bond quotations

Published in financial newspapers

The Wall Street Journal

Barron’s

Investor’s Business Daily

Bond quotations are organized according to their maturity, with
the shortest maturity listed first


Bid and ask prices are quoted per hundreds of dollars of par value

Online quotations at



/> 10
Treasury and Federal Agency
Bonds (cont’d)

Stripped Treasury bonds

One security represents the principal payment and a
second security represents the interest payments

Investors who desire a lump sum payment can choose the PO
part

Investors desiring periodic cash flows can select the IO part

Degrees of interest rate sensitivity vary

Several securities firms create their own versions of
stripped securities

Merrill Lynch’s TIGRs

The Treasury created the STRIPS program in 1985
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Treasury and Federal Agency
Bonds (cont’d)

Inflation-indexed Treasury bonds

In 1996, the Treasury started issuing inflation-indexed
bonds that provide a return tied to the inflation rate

The coupon rate is lower than the rate on regular
Treasuries, but the principal value increases by the
amount of the inflation rate every six months

Inflation-indexed bonds are popular in high-inflation
countries such as Brazil
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Computing the Interest Payment
of an Inflation-Indexed Bond
A 10-year bond has a par value of $1,000 and a
coupon rate of 5 percent. During the first six
months after the bond was issued, the inflation
rate was 1.3 percent. By how much does the
principal of the bond increase? What is the
coupon payment after six months?
65.50$$1,0135%Payment Coupon
013,1$1.013$1,000Principal
=×=
=×=
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Treasury and Federal Agency
Bonds (cont’d)


Savings bonds

Issued by the Treasury

Have a 30-year maturity and no secondary market

Series EE bonds provide a market-based interest rate

Series I bonds provide a rate of interest tied to inflation

Interest on savings bonds is not subject to state and local taxes

Federal agency bonds

Ginnie Mae issues bonds and purchases mortgages that are
insured by the FHA and the VA

Freddie Mac issues bonds and purchases conventional
mortgages

Fannie Mae issues bonds and purchases residential mortgages
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Municipal Bonds

Municipal bonds can be classified as either general
obligation bonds or revenue bonds

General obligation bonds are supported by he municipal
government’s ability to tax


Revenue bonds are supported by the revenues of the project for
which the bonds were issued

Municipal bonds typically pay interest semiannually, with
minimum denominations of $5,000

Municipal bonds have a secondary market

Most municipal bonds contain a call provision
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Municipal Bonds (cont’d)

Credit risk

Less than .5 percent of all municipal bonds
issued since 1940 have defaulted

Moody’s, Standard and Poor’s, and Fitch
Investor Service assign ratings to municipal
bonds

Some municipal bonds are insured against
default

Results in a higher cost for the investor