Fixed Income Analysis, Second Edition

CHAPTER 3

OVERVIEW OF BOND SECTORS AND INSTRUMENTS

I. INTRODUCTION

Thus far we have covered the general features of bonds and the risks associated with investing in bonds. In this chapter, we will review the major sectors of a country’s bond market and the securities issued. This includes sovereign bonds, semi-government bonds, municipal or province securities, corporate debt securities, mortgage-backed securities, asset-backed securities, and collateralized debt obligations. Our coverage in this chapter is to describe the instruments found in these sectors.

II. SECTORS OF THE BOND MARKET

While there is no uniform system for classifying the sectors of the bond markets throughout the world, we will use the classification shown in Exhibit 1. From the perspective of a given country, the bond market can be classified into two markets: an internal bond market and an external bond market.

A. Internal Bond Market

The internal bond market of a country is also called the national bond market. It is divided into two parts: the domestic bond market and the foreign bond market. The domestic bond market is where issuers domiciled in the country issue bonds and where those bonds are subsequently traded.

The foreign bond market of a country is where bonds of issuers not domiciled in the country are issued and traded. For example, in the United States. the foreign bond market is the market where bonds are issued by non-U.S. entities and then subsequently traded in the United States. In ...