Covered Bonds
February 12, 2025
In September 2018, Austria became the latest developed country to issue ultra-long-term bonds. As per the deal, Austria raised a total of $4.2 billion which have to be paid back after 100 years! The interest rates on this bond were 2.11%. This deal is being called the largest ever issue of bonds which have a […]
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In the previous article, we have studied about how vendor financing is being used as an alternate mechanism of finance in the infrastructure financing community. Similarly, leasing is also being used as a method of raising finances for infrastructure projects. Leasing is primarily used because this method allows conserving capital as well as provides many […]
In the previous articles, we have already seen that sporting franchises are required to raise a lot of capital at regular intervals. Hence, they are required to regularly raise debt from the marketplace. However, it is important to note that the decision regarding how much debt can be raised by a sporting franchise is not […]
Depreciation is an important concept in capital budgeting. This is because it is a non cash expense and ideally should not have any effect on the cash flows. This is the reason why it is added back during cash flow calculations. Since the amount of depreciation never actually left our bank account in the form […]
Fixed income securities used to be a relatively obscure part of the financial markets. Up until the late 1970s, bond markets were used by wealthy individuals, corporations, and even governments to park large sums of money in low-risk-low return securities. Since these bonds were mostly issued by sovereign authorities, they were considered to be one of the safest forms of investment. Also, since the world was on the gold standard, bond markets were generally not impacted by currency fluctuations and inflation concerns.
However, a lot has changed in the forthcoming decades. It is important to realize that the world has gone off the gold standard which means that the government can print as much money as it wants without having anything to back up the currency. This can lead to varying rates of inflation depending upon government policies. Since inflation eats into the value provided by fixed-income securities, varying rates of inflation also mean varying rates of return for fixed-income investors. Hence, going off the gold standard converted the dull fixed income market into a thriving market where speculators can make fortunes.
Today, fixed income markets are considered to be the most powerful market in the world. The volume of trading in the bond market is so huge that stock market volumes seem pale in comparison. Hence, it is important for every investor to have a good understanding of how fixed income securities work.
Fixed income securities can theoretically be of two types. They can either be bonds which are defined as debt which the company owes to outsiders. Or, it could be preferential shares that the company owes to its own investors. Preferential shares are equity shares and hence do not represent the claim of outsiders. For the most part, the term fixed income securities is commonly used to refer to bonds.
The global bond market is massive in size. The total amount of debt securities outstanding in the bond market total to approximately $119 trillion! Since the United States has one of the most well-developed systems of debt, it accounts for close to 40% of all the outstanding debt!
The fact that fixed income securities dwarf the equity markets can be gauged from statistics. In 2020, about $12.2 trillion worth of new fixed income securities were issued in the United States. However, during the same period only $390 billion worth of equity securities were issued in the stock markets.
As mentioned above, the fixed-income securities markets have gone through a lot of changes in recent years. Some of these changes have been mentioned below:
The bottom line is that fixed income securities are a huge part of the financial system. It would not be incorrect to say that they are the most prominent financial market in the world. Changes in this market have a huge impact on governments, corporations as well as individuals worldwide.
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