bond market

revenue bond

or limited obligation bond

Bond issued by a municipality, state, or public agency authorized to build, acquire, or improve a revenue-producing property such as a waterworks, electric generating plant, or railroad. Unlike general-obligation bonds, which are repaid through a variety of tax sources, revenue bonds are payable from specified revenues only, usually the revenues from the facility for which the bond was originally issued. Revenue bonds typically pay interest rates higher than those of general-obligation bonds. The separation of the revenue bond obligation from a municipality's other bond obligations allows the municipality to circumvent legislated debt limits.

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Electrostatic attraction between oppositely charged ions in a chemical compound. Such a bond forms when one or more electrons are transferred from one neutral atom (typically a metal, which becomes a cation) to another (typically a nonmetallic element or group, which becomes an anion). The two types of ion are held together by electrostatic forces in a solid that does not comprise neutral molecules as such; rather, each ion has neighbours of the opposite charge in an ordered overall crystalline structure. When, for example, crystals of common salt (sodium chloride, NaCl) are dissolved in water, they dissociate (see dissociation) into two kinds of ions in equal numbers, sodium cations (Na+) and chloride anions (Cl). Seealso bonding; covalent bond.

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Force holding atoms in a molecule together as a specific, separate entity (as opposed to, e.g., colloidal aggregates; see bonding). In covalent bonds, two atoms share one or more pairs of valence electrons to give each atom the stability found in a noble gas. In single bonds (e.g., HsinglehorzbondH in molecular hydrogen), one electron pair is shared; in double bonds (e.g., OdoublehorzbondO in molecular oxygen or H2CdoublehorzbondCH2 in ethylene), two; in triple bonds (e.g., HCtriplehorzbondCH in acetylene), three. In coordinate covalent bonds, additional electron pairs are shared with another atom, usually forming a functional group, such as sulfate (SO4) or phosphate (PO4). The number of bonds and the atoms participating in each (including any additional paired electrons) give molecules their configuration; the slight negative and positive charges at the opposite ends of a covalent bond are the reason most molecules have some polarity (see electrophile; nucleophile). Carbon in organic compounds can have as many as four single bonds, each pointing to one vertex of a tetrahedron; as a result, certain molecules exist in mirror-image forms (see optical activity). Double bonds are rigid, leading to the possibility of geometric isomers (see isomerism). Some types of bonds, such as the amide linkages that join the amino acids in peptides and proteins (peptide bonds), are apparently single but have some double-bond characteristics because of the electronic structure of the participating atoms. The configurations of enzymes and their substrates, determined by their covalent bonds (particularly the peptide bonds) and hydrogen bonds, are crucial to the reactions they participate in, which are fundamental to all life. Seealso aromatic compound; compare ionic bond.

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In finance, loan contract issued by local, state, and national governments and by private corporations, specifying an obligation to return borrowed funds. The issuer promises to pay interest on the debt when due (usually semiannually) at a stipulated percentage of the face value and to redeem the face value of the bond at maturity in legal tender. Bonds usually indicate a debt of substantial size and are issued in more formal fashion than promissory notes, ordinarily under seal. Government bonds may be backed by taxes, or they may be revenue bonds, backed only by revenue from the specific project (toll roads, airports, etc.) to which they are committed. Bonds are rated based on the issuer's creditworthiness. The ratings, assigned by independent rating agencies, generally run from AAA to D; bonds with ratings from AAA to BBB are regarded as suitable for investment. Seealso junk bond.

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(born Jan. 14, 1940, Nashville, Tenn., U.S.) U.S. politician and civil-rights leader. The son of prominent educators, Bond graduated from Morehouse College. In 1960 he helped create the Student Nonviolent Coordinating Committee (SNCC). In 1965 he was elected to the Georgia legislature, but his support of a SNCC statement accusing the U.S. of violating international law in the Vietnam War caused the legislature to deny him his seat. He was twice reelected and was twice more refused entry. The U.S. Supreme Court ruled his exclusion unconstitutional in December 1966, and he assumed his seat in January 1967. He later served in the state senate (1975–87). In 1998 he became chairman of the NAACP.

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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 2006, the size of the international bond market is an estimated $45 trillion, of which the size of the outstanding U.S. bond market debt was $25.2 trillion.

Nearly all of the $923 billion average daily trading volume (as of early 2007) in the U.S. bond market takes place between broker-dealers and large institutions in a decentralized, over-the-counter (OTC) market. However, a small number of bonds, primarily corporate, are listed on exchanges.

References to the "bond market" usually refer to the government bond market, because of its size, liquidity, lack of credit risk and, therefore, sensitivity to interest rates. Because of the inverse relationship between bond valuation and interest rates, the bond market is often used to indicate changes in interest rates or the shape of the yield curve.

Market structure

Bond markets in most countries remain decentralized and lack common exchanges like stock, future and commodity markets. This has occurred, in part, because no two bond issues are exactly alike, and the number of different securities outstanding is far larger.

However, the New York Stock Exchange (NYSE) is the largest centralized bond market, representing mostly corporate bonds. The NYSE migrated from the Automated Bond System (ABS) to the NYSE Bonds trading system in April 2007 and expects the number of traded issues to increase from 1000 to 6000.

Types of bond markets

The Securities Industry and Financial Markets Association classifies the broader bond market into five specific bond markets.

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:

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.

Bond market volatility

For market participants who own a bond, collect the coupon and hold it to maturity, market volatility is irrelevant; principal and interest are received according to a pre-determined schedule.

But participants who buy and sell bonds before maturity are exposed to many risks, most importantly changes in interest rates. When interest rates increase, the value of existing bonds fall, since new issues pay a higher yield. Likewise, when interest rates decrease, the value of existing bonds rise, since new issues pay a lower yield. This is the fundamental concept of bond market volatility: changes in bond prices are inverse to changes in interest rates. Fluctuating interest rates are part of a country's monetary policy and bond market volatility is a response to expected monetary policy and economic changes.

Economists' views of economic indicators versus actual released data contribute to market volatility. A tight consensus is generally reflected in bond prices and there is little price movement in the market after the release of "in-line" data. If the economic release differs from the consensus view the market usually undergoes rapid price movement as participants interpret the data. Uncertainty (as measured by a wide consensus) generally brings more volatility before and after an economic release. Economic releases vary in importance and impact depending on where the economy is in the business cycle.

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

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 Lehman 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.

See also


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