Introduction to Bonds Market and Instruments

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Bond Yield is the return that bondholder gets on a bond.

Yield = Coupon Amount/Bond Price

Yield to Maturity (YTM) is the total return one will get if (s)he holds the bonds till maturity.

There is an inverse relationship between the Yield and the Price of the bond. If the price is high, yield is low and vice versa.

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Different types of Bonds:

- Government Bonds: These are issued as a part of sovereign debt and are generally backed by the central governments of the country. However, state governments also issue bonds. The bonds issued by the government are also called as Treasury Bonds. The bonds issued by US are the safest, so as issued by any stable country. The bonds issued by developing countries do carry certain amount of risk as countries can default on payments. The credit risk of the countries are also rated by the credit rating agencies.

- Municipal Bonds: Municipalities also issues bonds. In India, it is not common but in countries like US, we see municipalities of cities issuing bonds.

- Corporate Bonds: These are the bonds issued by the companies. These companies involve greater risk than that associated with the government and hence the yield on corporate bond is normally greater.

- Zero Coupon Bonds: This is a type of bond that makes no coupon payments but instead is issued at a considerable discount to par value. For example, let's say a zero-coupon bond with a $1,000 par value and 10 years to maturity is trading at $600; you'd be paying $600 today for a bond that will be worth $1,000 in 10 years.