Financial Markets, Banking, and Monetary Policy

CHAPTER 8 The Bond Market

WHAT YOU WILL LEARN IN THIS CHAPTER

• The importance of the bond market as a source of financing for businesses and governments at all levels.
• The reason why bonds are commonly called coupon securities.
• The importance of bond indentures and covenants.
• The distinction between Treasury notes and bonds.
• The Treasury’s issuance of nominal yield and TIPS securities.
• The construction of Treasury STRIPS.
• What constitutes Treasury when-issued trading and a reopening of a security.
• The difference between Treasury on-the-run and off-the-run securities.
• The difference between the methods used to place securities in the primary market and to trade them in the secondary market.
• How government—or sovereign—debt markets play an important role in the functioning of other financial markets.
• Why only a small fraction of corporations have access to the bond market.
• How corporate bonds are placed in the primary market and traded in the secondary market.
• Why there is a conflict between corporate managers and bondholders.
• The various provisions that are commonly included in corporate indentures.
• Features of the below-investment-grade corporate bond market.
• The role played by private placements.
• The pricing of state and local government bond (munis).
• The difference between a general obligation and a revenue muni.
• Government-sponsored enterprises and the moral hazard problem they pose.
• Ways in which investors in bonds can be protected by insurance.
• How monetary policy works ...