CAPITAL MARKETS
PARTICIPANTS
TYPES OF CORPORATE BONDS
TYPES OF BONDS
MARKET TRADING
The primary issuers of capital market securities are federal and local governments and corporations. The federal government issues long-term notes and bonds to fund the national debt.
CAPITAL STRUCTURE
Corporations may enter the capital markets because they do not have sufficient capital to fund their investment opportunities.
Investment funds, corporations, and individual investors can all purchase securities offered in the primary market. You can think of a primary market transaction as one where the issuer of the security actually receives the proceeds of the sale.
When firms sell securities for the very first time, the issue is an initial public offering (IPO). Subsequent sales of a firm's new stocks or bonds to the public are simply primary market transactions (as opposed to an initial one).
Whereas most money market transactions originate over the phone, most capital market transactions, measured by volume, occur in organized exchanges. An organized exchange has a building where securities (including stocks, bonds, options, and futures) trade.
GENERAL OBLIGATION BONDS
MUNICIPAL BONDS
REVENUE BONDS
TREASURY BONDS
CORPORATE BONDS
Bonds are securities that represent a debt owed by the issuer to the investor. Bonds obligate the issuer to pay a specified amount at a given date, generally with periodic interest payments
THE BOND INDENTURE
The U.S. Treasury issues notes and bonds to finance the national debt. The difference between a note and a bond is that notes have an original maturity of 1 to 10 years while bonds have an original maturity of 10 to 20 years.
Are securities issued by local county and state governments. The proceeds from these bonds are used to finance public interest projects such as schools, utilities, and transportation systems.
Do not have specific assets pledged as security or a specific source of revenue allocated for their repayment. Instead, they are backed by the "full faith and credit" of the issuer.
By contrast, are backed by the cash flow of a particular revenue-generating project. For example, revenue bonds may be issued to build a toll bridge, with the tolls being pledged as repayment.
When large corporations need to borrow funds for long periods of time, they may issue bonds. Most corporate bonds have a face value of $1000 and pay interest semiannually (twice per year).
Is a contract that states the lender's rights and privileges and the borrower's obligations. Any collateral is offered as security to the bondholders.
SECURED
UNSECURED
MORTGAGE BONDS
EQUIPMENT TRUST SERTIFICATES
Are used to finance a specific project. For example, a building may be the collateral for bonds issued for its construction.
Are bonds secured by tangible non-real-estate property, such as heavy equipment or airplanes. Typically, the collateral backing these bonds is more easily marketed than the real property backing mortgage bonds.
VARIABLE-RATE BONDS
JUNK BONDS
DEBENTURES
Are long-term unsecured bonds that are backed only by the general creditworthiness of the issuer.
The interest rate on these securities is tied to another market interest rate, such as the rate on Treasury bonds, and is adjusted periodically. The interest rate on the bonds will change over time as market rates change.
However, when companies ran into financial difficulties, their bond ratings would fall. Holders of these downgraded bonds found that they were difficult to sell because no well-developed secondary market existed.
FINANCIAL GUARANTEES
Ensures that the lender (bond purchaser) will be paid both principal and interest in the event the issuer defaults. Make sense only when the cost of the insurance is less than the interest savings that result.