Bonds and Bond Markets

Key Takeaways

  • Bond features that can determine risk and return include

    • coupon and coupon structure,
    • maturity, callablility, and convertibility,
    • security or debenture,
    • seniority or subordination,
    • covenants.

  • The U.S. government issues Treasury

    • bills for short-term borrowing,
    • notes for intermediate-term borrowing,
    • bonds for long-term borrowing,
    • TIPS, which are inflation-protected.

  • State and municipal governments issue

    • revenue bonds, secured by project revenues, or
    • general obligation bonds, secured by the government issuer.

  • State and municipal government muni bonds may or may not have tax advantages for certain investors.
  • Corporate bonds may be issued through the public bond markets or through private placement.
  • U.S. government bonds are issued through auctions managed by the Federal Reserve.
  • The secondary bond market offers little transparency because of the differences among bonds and the lower volume of trades.
  • To help provide transparency, rating agencies analyze default risk and rate specific bonds.