Us Bond Market New Employee Training Program Training Document

Abstract

In this training document, each of the following will be addressed: 1) the key players in the market and the types of investments available to both individual and institutional investors, 2) the way transactions are carried out, and 3) the relation, if any, between the bond markets and the stock markets.

KEY PLAYERS IN THE MARKET

The bond market can essentially be broken down into three main groups: issuers, underwriters, and purchasers.

An issuer is a legal entity that develops, registers, and sells bonds or other debt instruments in the bond market for the purpose of financing its operations of their organizations (Investopedia.com, 2006). Issuers may be domestic or foreign governments, corporations, or banks. The biggest of these issuers is the government, which uses the bond market to fund a country's operations, such as social programs and other necessary expenses. Banks are also key issuers in the bond market and they can range from local banks up to "supranatural" banks such as the European Investment Bank, which issues debt in the bond market (Investopedia.com, 2006). The final major issuer is the corporate bond market, which issues debt to finance corporate operations (Investopedia.com, 2006). Issuers must pay dividends and distributions if declared or interest to lenders and follow the terms of their contractual obligations with their investors (Investopedia.com, 2006). The types of securities that can be issued include common and preferred stock, bonds, notes, debentures, bills and derivatives.

An underwriter, or institutional investor, is a company or other entity that administers the public issuance and distribution of securities from a corporation or other issuing body (Investopedia.com, 2006). An underwriter works closely with the issuing body to determine the offering price of the securities, buys them from the issuer, and sells them to investors via the underwriter's distribution network (Investopedia.com, 2006). The underwriting segment of the bond market is traditionally made up of investment banks and other financial institutions that help the issuer to sell the bonds in the market.

The final players in the market are those who buy the debt (purchasers) that is being issued in the market. When you buy a bond, you are loaning your money for a certain period of time to the issuer. In return, bond holders get back the loan amount plus interest payments. Governments play one of the largest roles in the market because they borrow and lend money to other governments and banks (Investopedia.com, 2006). Furthermore, governments often purchase debt from other countries if they have excess reserves of that country's money as a result of trade between countries (Investopedia.com, 2006). Purchasers include governments, corporations, and banks as well as the individual.

TYPES OF INVESTMENTS AVAILABLE TO INDIVDUAL AND INSTITUTIONAL INVESTORS

A wide variety of investment vehicles are available to individual investors such as short-term vehicles, common stock, fixed-income securities, and other popular investment vehicles such as real estate and tangibles (Gitman & Joehnk, 2005). Although investors typically put their money into stocks and bonds, many other types of investments exist that can be used to diversify investment portfolios and meet the objectives of businesses, individuals, and portfolio managers alike.

Short-term vehicles include savings instruments that usually have lives of 1 year or less (Gitman, et al, 2005). They generate income--which can be quite high during periods of high interest rates (Gitman, et al, 2005). They are popular among conservative investors because they generally carry little or no risk. Short-term vehicles are often used to "warehouse" idle funds and earn a return while long-term vehicles are being evaluated (Gitman, et al, 2005). Their primary function is to provide a pool of reserves that can be used for emergencies or simply to accumulate funds for some specific purpose (Gitman, et al, 2005). Short-term vehicles also provide liquidity; they can be converted into cash quickly and with little or no loss in value (Gitman, et al, 2005). Some examples of short-term vehicles include deposit accounts, savings bonds, U. S. Treasury bills (T-bills), certificates of deposit (CDs), commercial paper, banker's acceptances, money market mutual funds.

Common Stock is an equity investment that represents ownership in a corporation (Gitman, et al, 2005). Each share of common stock represents a fractional ownership interest in the firm (Gitman, et al, 2005). Simply put, common stock is ownership in part of a company. For every stock you own in a company, you own a small piece of the office furniture, company cars, or even that lunch the boss paid for with the company credit card (Investopedia.com, 2006). More importantly, you are entitled to a portion of the company's profits and any voting rights attached to the stock (Investopedia.com, 2006). Profits are typically paid out in either of two ways: 1) dividends--periodic payments made by the corporation to its shareholders from its current and past earnings, or 2) capital gains--which result from selling the stock (or any asset) at a price that exceeds its original purchase price (Gitman, et al, 2005). The more shares you own, the larger the portion of the company (and profits) you own. Common stock is the most popular form of investment vehicle (Gitman, et al, 2005).

Fixed-income securities are investment vehicles that offer a fixed periodic return (Gitman, et al, 2005). Some forms of fixed-income securities are obligated by contract to pay guaranteed returns, and some "have specified, but not guaranteed, returns," (Gitman, et al, 2005). Fixed-income securities offer a fixed return to their investors, but "tend to be popular during periods of high interest rates, when investors seek to "lock-in" high returns," (Gitman, et al, 2005). They include (Gitman, et al, 2005): bonds, preferred stock, and convertible securities.

Bonds--are the long-term debt instruments (IOUs) issued by corporations and governments (Gitman, et al, 2005). Ben Best, an independent writer on various subjects, including Business and Investments, explains corporate bonds in his words,

"Corporations can raise capital for long-term projects by borrowing funds from banks, issuing shares or selling bonds. Issuing shares dilutes control of the company and dividends can only be paid on after-tax income. Banks charge high interest and are reluctant to loan for over five years. A company with a good credit rating can issue long-term bonds at a low interest