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The participants in the transactions are primarily brokers, dealers and established institutions. The buyers and sellers in this financial market are individuals, traders, investors from various institutions and governments. The financial dealings happen over the counter and the system is decentralized.
The bond market can be classified into 5 major categories:
- Corporate bonds
- Municipal bonds
- Government and agency bonds
- Mortgage and asset backed bonds
- Funding bonds
In colloquial terms, “bond market” generally refers to government bond market. In this type of financial market, credit risks are low whereas liquidity and size of the institution is high. Interest rates are therefore quite sensitive. The rate of interest and the valuation of bonds share an inversely proportional relationship. Hence, bond market is quite volatile when the yield curve is taken into account.
A large proportion of unpaid bonds are held by various institutions like mutual funds, pension funds and banks. About 10 percent of the bond market is in the hands of individual bond holders. These individuals participate in the dealings through unit-investment trusts, bond funds and closed-end funds. Another popular option of direct investment and trading of bonds are exchange traded funds, popularly referred to as ETFs.
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