FİNANSAL PİYASALAR VE KURUMLAR - Deneme Sınavı - 7

There are two main participants of the bond markets. The first group is the borrowers. Borrowers are the bond issuers such as governments, municipalities, financial and real sector companies. The second group is the bond investors or holders. They are the institutions or individuals who want to evaluate their savings in the bond markets. By purchasing bonds, they lend their savings to the borrowers in need of funds.

Bond is a fixed-income security and a type of debt instrument. Bond is a long-term financial instrument issued by companies or governments, which provides interest and principal payments to the holders on specific dates. There are two main participants of the bond markets. The first group is the borrowers.  The second group is the bond investors or holders.

There are some elements that determine the characteristics of the bonds. These are ;

Bonds are divided into two categories in terms of ownership: bearer bonds and registered bonds. Bearer bond is a bond type that the owner is the person who holds it. They have coupons that are presented to a bank for payment. The issuer of the bearer bonds does not know the holder of the bond and who receives the cash flows of the bond.

Coupon rates of government bonds are lower than the coupon rates of the company bonds, since the return of the bondholders are considered as risk-free return.

The value of a financial asset is the present value of future cash flows expected from the asset. For this reason, determination of price of an asset requires an estimation of expected cash flows and an appropriate discount factor, which refers to the required rate of return or required yield.

The current yield of a bond is calculated by dividing the coupon payment to the current price of the bond

YTM is the rate of return that the investor will obtain if he buys the bond at a certain price and holds until the maturity.

Sometimes, those in need of funds may issue bonds that give the issuer the right to call back. In this case, yield to call is an appropriate measure to evaluate the return of the bond. YTC is the rate that equals the present value of the expected cash flows of the bond to the price plus accrued coupon payments.

Currency Risk (Foreign Exchange Risk): In general terms, currency risk can be defined as the potential loss occurs due to the changes in the exchange rates. The bondholders undertake currency risk when they invest in a bond which pays the coupons and principal in a foreign currency.

Duration is a measure of interest rate sensitivity of bond and gives the weighted average time to receive the cash flows of the bond.