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Money Market - Coggle Diagram
Money Market
T-Bill
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T-Bills are short-term debt obligations issued & backed by the government. They are sold in denominations of face value of $1,000 and have a maturity of less than 1 year, such as a month, two months or six months.
T- Bills are discounted instruments in the sense they are issued at the discount & redeemed at the par.
Example: A T-Bill from the US Government with a denomination or face value of $ 10,000 will be issued at a discounted price of $9800 for the duration of 3 months .Here the investors will pay $9,800 when issued & will collect $10,000 at redemption after 3 months, thus effectively earning a return of $200.
Bonds
Key Components
Face Value (Par Value):
This is the initial amount of money borrowed by the issuer, which will be repaid to the bondholder at the bond's maturity date.
Coupon Rate:
The coupon rate, also known as the interest rate, is the annual rate at which the issuer agrees to pay interest to the bondholder. It's typically expressed as a percentage of the bond's face value.
Maturity Date:
This is the date on which the issuer is obligated to repay the bond's face value to the bondholder. At maturity, the bond "matures," and the investor receives the principal amount.
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Yield:
The yield is the total return an investor can expect to earn from a bond. It takes into account the coupon rate, the bond's market price, and the time remaining until maturity. Yield can be expressed as the current yield or the yield to maturity (YTM).
Market Price:
The market price of a bond can fluctuate based on changes in interest rates and the perceived credit risk of the issuer. If interest rates rise, the market price of existing bonds may fall, and vice versa.
Issuer:
This is the entity that borrows money by issuing the bond. It can be a government (in the case of government bonds), a corporation (for corporate bonds), or other entities.
Types
Puttable Bonds
A bond with an option to sell or put the bond to the issuer before maturity. The holder of the puttable bond has the right, but not the obligation, to demand early repayment of the principal.
It can be done so that the holder can sell it back to a company incase he thinks that the credit worthiness of the issuing company is falling or if the interest rate in the market is increasing and the investor can invest in a bond that pays higher interest rate.
JUNK BONDS
Junk bonds are unsecured bonds from issuers with a poor credit rating, which affects the probability of repayment of the bonds. The credit risk on these bonds is high. Your high risk provides a high coupon rate.
Callable Bonds
A callable bond is a bond that can be redeemed by the issuer prior to its maturity. Usually a premium is paid to the bond owner when the bond is called. These are also known as ‘redeemable bonds.’
• A company can call back the bonds if the interest rate falls in the market , so that the bonds can be financed at a cheaper rate.
CONVERTIBLE BONDS
Here Bond holders have a option to convert the capital he invested in bonds to be coverted to equity at the time of maturity. The conversin ratio is already known.
Floating Rate Notes
A floating-rate note (FRN) aka Floaters is a debt instrument issued fo a period of 2 – 5 years .They pay a variable interest rate tied to a benchmark rate like US Treasury note rate, the Fed funds rate etc.
Floating-rate notes have quarterly coupons, meaning that they pay interest four times a year, however the coupons can be also paid monthly, semiannually, or annually
PERPETUAL BONDS
• Perpetual bond is a bond with no maturity date. Interest will be paid “forever” • Interest payment as long as the bond is held. •High credit risk o If interest rates rise, bond may carry lower interest rate than prevailing.
FOREIGN CURRENCY BONDS
Foreign Currency Bond are bonds which are issued by governments, companies and large corporate entities in a foreign country to raise capital. Take advantage of differences in the interest rates
Euro Bond:: A Euro bond is an international bond that is denominated in a currency not native to the country where it is issued. Euro bonds are named after the currency they are denominated in. For example, Euroyen and Eurodollar bonds are denominated in Japanese yen and American dollars respectively.
DEFERRED BONDS
• Deferred bonds pays interest only upon maturity. • Unlike most bonds, a deferred bond does not make periodic, or "coupon," payments over its lifetime. • Instead, the interest accrues and is paid out when the bond matures.
CORPORATE BONDS
It is a bond that a corporation issues to raise money effectively 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.
• Corporate bonds are often listed on major exchanges (listed bonds) and ECNs • The coupon (i.e. interest payment) is usually taxable.
ZERO COUPON BONDS
A zero-coupon bond is a bond bought at a lower price (issued at a discount), with the face value repaid at the time of maturity (redeemed at par).
• It does not make periodic interest payments, or have so-called "coupons", hence the term zerocoupon bond. • When the bond reaches maturity, its investor receives its par (or face) value.
TREASURY BONDS
A Treasury Bond is a bond issued by the Government and are issued for a term of 20 to 30 years. These bonds pay a fixed rate of interest through out the life of the bond and the interest is paid on semi annual basis.
INFLATION INDEXED BONDS
Inflation-indexed bonds are bonds where the principal/interest is indexed to inflation and retail price index. They are thus designed to cut out the inflation risk of an investment.
Inflation-indexed bonds are bonds where the principal/interest is indexed to inflation and retail price index. They are thus designed to cut out the inflation risk of an investment.
GOVERNMENT BONDS
A government bond is a bond issued by a national government, generally with a promise to pay periodic interest payments and to repay the face value on the maturity date.
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A bond is a fixed income security that represents a loan made by an investor to a borrower. When you purchase a bond, you are essentially lending your money to the issuer (which could be a government, corporation, or other entity) in exchange for periodic interest payments and the return of the bond's face value (or principal) at maturity.
Bonds are commonly used by both governments and corporations to raise capital for various purposes, including financing projects, refinancing debt, or covering operating expenses. They are considered relatively lower-risk investments compared to stocks because they provide a predictable stream of income in the form of interest payments and the return of principal at maturity.