BOND MARKETPrepared by: Fatma GÜLER 2005431016

Hakan GÜNEŞ 2005431018 Merve ÖZKALAY 2005431029

OUTLINE

Definition of Bond MarketActors & InstrumentsWhy do we need this market?Applications in USAApplications in Turkey

Basic Definitions

The bond market (also known as the debt, credit, or fixed income market) is a financial market where participants buy and sell debt securities, usually in the form of bonds.

A bond is a debt security, similar to an I.O.U. When you purchase a bond, you are lending money to a government, municipality, corporation, federal agency or other entity known as an issuer.

Basic Definitions

The Yield to maturity (YTM) of a bond is the internal rate of return (IRR, overall interest rate) earned by an investor who buys the bond today at the market price, assuming that the bond will be held until maturity, and that all coupon and principal payments will be made on schedule.

Classification of Bond Market

In USA, The Securities Industry and Financial Markets Association classifies the broader bond market into five specific bond markets: Corporate Government & agency Municipal Mortgage backed, asset backed, and

collateralized debt obligation Funding

ACTORS IN USA

Bond market participants are similar to participants in most financial markets and are essentially either buyers (debt issuer) of funds or sellers (institution) of funds and often both. Participants include: Institutional investors Governments Traders Individuals

TYPES OF BOND

TYPES OF BOND

Types of bonds by issuer

Types of bonds by payout

TYPES OF BONDS BY ISSUER

Agency bond Corporate bond (Senior debt,

Subordinated debt) Distressed debt Emerging market debt Government bond Municipal bond Sovereign bond

TYPES OF BONDS BY PAYOUT

Accrual bond  Auction rate security  Callable bond  Commercial paper  Convertible bond  Exchangeable bond  Fixed rate bond  Floating rate note 

TYPES OF BOND BY PAYOUT

High-yield debtInflation-indexed bond Inverse floating rate note Perpetual bondPuttable bond Reverse convertible Zero-coupon bond

Bond Quotation

In Turkey, ISIN Code, which is produced by İMKB Takas ve Saklama Bankası A.Ş., is used to identify securities in bond market.

1 2 3 4 5 6

TR B 04 09 02 T 1 4 Ülke Kodu a b c

ISIN CODE

1. Country Code: Turkey = TR

2. Type of Security T: Devlet Tahvili B: Hazine Bonosu G: Kamu Ortaklığı İdaresi Gelir Ortaklığı

Senedi D: Diğer Kamu Borçlanma Menkul Senetleri

ISIN CODE

3. Security’s

a: day

b: month

c: year

4. Security’s currency and type

T: TL ve Tüm Menkul Kıymet

A: TL ve Anapara

ISIN CODE

K: TL ve Kupon

F: Yabancı Para ve Tüm Menkul Kıymet

P: Yabancı Para ve Anapara

C: Yabancı Para ve Kupon

5. Sequence number of same dated and same kind of securities

6. Control Number

Why IMKB Bond Market?

Fixed Rate Bond

Constitute a transparent secondry market

Increase the issue of securities

Distribute them efficintlybetween

İntermediary agencies

Why IMKB Bond Market?

Repo and Reverse Repo

Set the flow of funds between

İntermediary agent

Make the repo transactions İn transparent environment

Adventages of Bonds by Issuer

Costs are certain and limited

Lower risks than stocks

Interest rates are discounted from tax base

Business owner do not share administration and audit with bond holder

Disadvantages of Bonds by Issuer

Irregular earnings

Not offset interest rate

Risk for business

Disadvantages of Bonds by Issuer

Although financial leverage work well, in a high debt situation stock prices may fall

They cover long run and so riskBecause they are long run, they involve

high judgements than short run.

Advantages of Investing Bond Market

Periodic interest paymentsPredetermined quantity and dateLow riskTrade before maturity

Globalization in Bond Market

Country risk

Exchange rate risk

Interest rate risk

Credit risk

Investors

BOND MARKET APPLICATION IN THE U.S.

World total bond market size(2008) $ 67 trillion

$33.5 trillion is belong to US bond market Daily Trading Volume in the US

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BOND MARKET APPLICATION IN THE U.S.

The US government funds their borrowing through Treasury notes and Treasury bonds.

Treasury notes’ maturity is up to 10 years

Bonds are issued from 10 years to 30 years.

Both are issued in denominations of $1000 or more.

Semiannual interest payment called coupon payments

The New York Stock Exchange (NYSE) is the largest centralized bond market,mostly corporate bonds.

DAILY AVERAGE US BONDS VOLUME

US Market Size

Nearly 10% of all bonds outstanding are held directly by households

The US was the largest market for domestic bonds in 2008 (43% of amounts outstanding). 25% were in mortgage

backed bonds 20% in corporate debt 18% in Treasury bonds

Remainder in Federal Agency securities and municipal bonds

BOND MARKET APPLICATION IN THE TURKEY

Istanbul Stock Exchange (ISE) Bond Market includes

Government bonds, Revenue indexed bonds, Corporate bonds

Securities less than a year maturity called “Bills” which are offered at a discount and payable by the issuer at nominal value at the end of the term.

Government Debt Securities (GDS) as they are issued by the Undersecretariet of Treasury for domestic market.

Private sector bonds or “Corporate bonds” are issued by the joint stock companies.

Eurobond securities are also issued in Turkey

Market Patricipants in the Turkish Bond Market

Central Bank of Republic of Turkey Registered Commercial Banks Investment Banks and Brokerage Houses, Classify two type of bond market,

Primary market -when the bonds are issued first by the Treasury-

Secondary market -bonds after first issues by the intermediary institutions-.

The most active organisation for bond trade is ISE Bond market by doing Outright purchases and sales market and repo and reverse repo market.

The Central Bank of Turkey also does Open Market Operations with outright purchases and sales and Repo Reverse Repo in Secondary market.

Bond Market Instruments in Turkey

Kesin alım satım pazarı TL ve dövize endeksli

Devlet İç Borçlanma Senetleri (DİBS)

TL ve dövize endeksli Gelir Ortaklığı Senetleri

Gayrimenkul Sertifikaları Borsa kotundaki özel

sektör tahvilleriRepo Ters Repo Pazarı

Bond-Bill-Repo-Reverse Repo Volumes

Btw 2002-2008 (million TL)

09:30 Opening time of İstanbul Stock Exchange Orders are transmitted via automated terminals or phone

to the market on 212-298 22 22 –For the same day value transactions 09:30-14:00- For different dated value transactions 09:30-17:00

12:00-13:00 Midday break If the order matches with the order appear in the screen,,

the same or a better rated and appropriate sized orders should be transmitted

Transmitting order following 18.2.4 To transmit of the best order to the screen automatically,

to set in other orders giving priority to price and timing. If the orders are executed, confirmation should be given

to the counterpart and transmitting second degree orders to the screen

14:00 The market closes for the same day value transactions (Unexecuted orders are cancelled automatically)

Until 16:30, the parties settle their obligation for the same day value transactions.

17:00 Market closing time.

OUTRIGHT PURCHASES AND SALES MARKETClassified by Government Securities and Corporate Securities over the

period of 2000 and 2009.

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Trading Volume

Government Securities Trading Volume Over Period of 2000-2009

Volume in US Dollar, ( Million)Source: Istanbul Stock Exchange

TURKISH DEBT SECURITIES - Turkish securities’ maturity are

between 1 year and 3 years usually.- The country sovereign credit rating is

low due to volatility and economic variables.

- ( Rating is BB- according to S&P, November 2008.)[1]

- Due to low credit rating, Turkish securities offer great risk premium.

- Since Turkish bond market is new and developing, the types that are issued are less.

- Trading volume is low when compared to developing world economies. In 2008 the trading volume of Turkish securities were about 292 Billion US Dollar.[2]

USA DEBT SECURITIES- US securities maturity are between

10 years and 30 years.- The country credit rating is high due

to more stable macro economical variables.

- ( Rating is AAA according to S&P, October 2009.)[3]

- Due to high credit rating, US securities’ risk premium is lesser.

- As the US bond market is too sophisticated, there are many types of bonds issued

- Trading volume is extremely high due to being a central economy and having more market players. In 2008 the trading volume of US securities were about 33 Trillion US Dollar.[4]

[1] Source: Financial Times, S&P Downgrades Turkey’s Credit Rating, 14.November 2008[2] Source: Istanbul Stock Exchange[3] Source: www.dailyfinance.com, Moody’s warning on the US Credit Rating. [4] Source: http://en.wikipedia.org/wiki/Bond_market

General Look to Turkish & US Bond Market