“The financial market in which all the contributors can issue new debt, buy or sell debt securities in the form of bonds.”This is the Bond Market also known as Debt Market includes securities and corporate debt securities, transfer of capital from savers to organizations that require capital for government projects or ongoing operations. Here the bondholders can issue new debt in the primary market and trade debt securities in the secondary market. Their products are not only customarily in the form of bonds, but also in the form of bills and notes. The main aim of this financial market is to give long term financial aid and funding for public and private expenditure. Most of the people like traders, institutional investors, governments, and individuals are the ones who purchase the products given by large institutions. This may be in the form of pension funds, mutual funds or among the other product types. Also, a bond fund is a much better way to invest in bonds than buying single bond securities. These bond funds don’t have a maturity date for the repayment of the capital; hence the capital amount can change invested may change from time to time. A bond fund is bought and sold according to the market condition but rarely held until maturity. Bonds come in various different varieties, and the most common types are:
- Government Bonds are issued by the national and the lower level government. The government bonds are backed up by the aptness to tax its people and to print the currency. The main fact is that the strength of the US dollar can affect the economies of the Middle East, despite the amount of produce of the resources in the middle eastern country. For instance, all the bills issued by the U.S. government are risk-free, plus the bills of all the stable companies. Majorly the debt of all the developing countries carries a substantial risk with it. Therefore, countries with greater default risk issues’ bonds at a higher interest rate, which increases the cost of borrowing.
- Corporate Bonds are issued by corporations. The bonds issued by them are called investment grade and the ones below the grade are junk. They have a massive role in the overall bond market. These corporate bonds have a specific time limit or maturity, if bond’s maturity is less than 5 years, it is a short-term bond, there are other different types of corporate bond called intermediate and long-term bonds. Due to the higher risk of defaulting than the government, the aim to produce a higher yield. Companies can issue bills with fixed or variable interest rate or maturity.
- Asset-Backed Security is the third category of bonds the government of Abu Dhabi has been issuing the bonds at the Emirate level. The Emirate of Abu Dhabi issued it’s first $1 billion five-year conventional bonds in the year of 2007, prior to the global financial crisis. This prompted Dubai to do the same and issue a 420 billion Bond in 2009. Due to more regulations, the conventional and the Sharia bonds are being issued as the gain access to the diverse bowl of global investors. The Emirates Development Bank is the first one in the world to issue a $750 million bond.
The twin enemies that affect the bond prices are inflation and changing interest rates. A rise in either one of them will cause the bond prices to drop drastically. They act just like the bond yields, but they move in the opposite direction from the bond prices leading to loss. These risks tend to lead to a loss of millions of dollars if not taken out before the deterioration of the economy. Bond trading has always been like a star in the trader’s eyes due to the exploding reaction from the UAE government itself.
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