Bond

Bond
Name	Bond
Type	Debt security
Issuer	Corporations; United States Department of the Treasury; United Kingdom Debt Management Office; European Investment Bank
Currency	Multiple currencies (e.g., United States dollar, Euro, Japanese yen)
Maturity	Short-term; medium-term; long-term
Interest	Fixed; floating; zero-coupon
Markets	Primary market; secondary market; London Stock Exchange; New York Stock Exchange

Bond A bond is a debt instrument representing a contractual obligation by an issuer to pay interest and return principal to a holder at specified dates. Bonds are issued by sovereigns, supranationals, municipalities, and corporations such as Apple Inc. and Toyota Motor Corporation to finance projects, deficits, or operations. Markets for bonds interact with central banks like the Federal Reserve and institutions such as the International Monetary Fund and Bank for International Settlements.

Etymology and terminology

The English term derives from Middle English usage related to legal bonds and obligations used in chancery proceedings, akin to instruments recorded in repositories such as the Magna Carta archives. Key terms include principal, coupon, maturity, yield, and par value; practitioners reference manuals from the International Organization of Securities Commissions and textbooks by authors like those associated with Princeton University and Harvard Business School. Variants include debentures, notes, and commercial paper as catalogued in publications from the Securities and Exchange Commission and the Financial Conduct Authority.

Types of bonds

Sovereign bonds are issued by national treasuries such as the United States Department of the Treasury and the German Finance Agency. Municipal bonds are issued by subnational authorities like the New York City Municipal Water Finance Authority and the Port of Barcelona. Corporate bonds include investment-grade issues from firms such as Microsoft and high-yield or "junk" bonds associated with issuers profiled by Moody's Investors Service, Standard & Poor's, and Fitch Ratings. Structured products include asset-backed securities (ABS) and mortgage-backed securities (MBS) created in markets influenced by institutions like Fannie Mae and Freddie Mac. Supranational bonds come from bodies such as the World Bank and the European Investment Bank.

Issuance and markets

Primary issuance occurs via syndication by underwriters from firms such as Goldman Sachs and J.P. Morgan Chase or via auctions managed by treasury departments as in the United States Treasury auction process. Secondary trading takes place on venues including the London Stock Exchange, New York Stock Exchange, and electronic platforms operated by the Depository Trust & Clearing Corporation. Market liquidity, bid-offer spreads, and settlement cycles are governed by central counterparties like LCH and clearinghouses supervised by regulators such as the European Securities and Markets Authority.

Valuation and pricing

Bond pricing is determined by discounting promised cash flows using yield curves such as the LIBOR benchmark historically and successors like the SOFR reference rate. Duration and convexity measures, used by analysts from institutions like BlackRock and Vanguard, quantify interest-rate sensitivity; models such as the Vasicek and Cox–Ingersoll–Ross frameworks are applied in academic settings at London School of Economics and Massachusetts Institute of Technology. Spread analysis compares yields to benchmarks like German bunds and US Treasury bond yields to infer credit premia.

Risk and credit assessment

Credit risk assessment is performed by agencies including Moody's Investors Service, Standard & Poor's, and Fitch Ratings which assign ratings from investment-grade to speculative categories. Interest-rate risk, reinvestment risk, liquidity risk, and inflation risk are evaluated using tools developed in research at Columbia Business School and by central banks such as the European Central Bank. Sovereign risk considerations involve events like restructurings exemplified by cases involving Argentina and Greece, while counterparty risk features in dealer networks centered in financial hubs like London and New York City.

Regulation and legal framework

Bond markets operate under regulatory regimes such as those enforced by the Securities and Exchange Commission in the United States and the Financial Conduct Authority in the United Kingdom. International rules for disclosure and market conduct draw on standards from the International Organization of Securities Commissions and directives like the Markets in Financial Instruments Directive (MiFID) in the European Union. Insolvency and creditor rights are shaped by statutes and case law in jurisdictions including the United States Bankruptcy Code and decisions from courts such as the Supreme Court of the United States.

Historical development and notable examples

Early forms of public debt appeared in city-states and polities such as the Medici Bank operations and the public finance of the Dutch Republic in the 17th century; the growth of sovereign bond markets accelerated with instruments like the British consols associated with the Bank of England. In modern history, landmark episodes include the financing of the American Revolutionary War via continental debt, the role of bond markets in the financing of industrialization by companies such as Standard Oil, and crises like the 2007–2008 financial crisis that centered on mortgage-backed securities and firms including Lehman Brothers. Contemporary reference points include benchmark issues by the United States Department of the Treasury (e.g., 10-year Treasury notes), sovereign debt restructurings in Argentina, and large corporate bond offerings from multinationals such as Apple Inc..

Category:Fixed-income financial instruments