BOND MARKET

1. BOND MARKET Prepared by: Fatma GÜLER 2005431016 Hakan GÜNEŞ 2005431018 Merve ÖZKALAY 2005431029

2. OUTLINE • Definition of Bond Market • Actors & Instruments • Why do we need this market? • Applications in USA • Applications in Turkey

3. Basic Definitions • The bond market (also known as the debt, credit, or fixed income market) is a financial market where participants buy and sell debt securities, usually in the form of bonds. • A bond is a debt security, similar to an I.O.U. When you purchase a bond, you are lending money to a government, municipality, corporation, federal agency or other entity known as an issuer.

4. Basic Definitions • The Yield to maturity (YTM) of a bond is the internal rate of return (IRR, overall interest rate) earned by an investor who buys the bond today at the market price, assuming that the bond will be held until maturity, and that all coupon and principal payments will be made on schedule.

5. Classification of Bond Market In USA, The Securities Industry and Financial Markets Association classifies the broader bond market into five specific bond markets: • Corporate • Government & agency • Municipal • Mortgage backed, asset backed, and collateralized debt obligation • Funding

6. ACTORS IN USA Bond market participants are similar to participants in most financial markets and are essentially either buyers (debt issuer) of funds or sellers (institution) of funds and often both. Participants include: • Institutional investors • Governments • Traders • Individuals

7. TYPES OF BOND

8. TYPES OF BONDS BY ISSUER • Agency bond • Corporate bond (Senior debt, Subordinated debt) • Distressed debt • Emerging market debt • Government bond • Municipal bond • Sovereign bond

9. TYPES OF BONDS BY PAYOUT • Accrual bond • Auction rate security • Callable bond • Commercial paper • Convertible bond • Exchangeable bond • Fixed rate bond • Floating rate note

10. TYPES OF BOND BY PAYOUT • High-yield debt • Inflation-indexed bond • Inverse floating rate note • Perpetual bond • Puttable bond • Reverse convertible • Zero-coupon bond

12. Bond Quotation In Turkey, ISIN Code, which is produced by İMKB Takas ve Saklama Bankası A.Ş., is used to identify securities in bond market. 1 2 3 4 5 6 TR B 040902 T 1 4 Ülke Kodu a b c

13. ISIN CODE • Country Code: Turkey = TR • Type of Security • T: Devlet Tahvili • B: Hazine Bonosu • G: Kamu Ortaklığı İdaresi Gelir Ortaklığı Senedi • D: Diğer Kamu Borçlanma Menkul Senetleri

14. ISIN CODE • Security’s a: day b: month c: year 4. Security’s currency and type T: TL ve Tüm Menkul Kıymet A: TL ve Anapara

15. ISIN CODE K: TL ve Kupon F: Yabancı Para ve Tüm Menkul Kıymet P: Yabancı Para ve Anapara C: Yabancı Para ve Kupon • Sequence number of same dated and same kind of securities • Control Number

16. Why IMKB Bond Market? Fixed Rate Bond Constitute a transparent secondry market Distribute them efficintly between İntermediary agencies Increase the issue of securities

17. Why IMKB Bond Market? Repo and Reverse Repo Set the flow of funds between İntermediary agent Make the repo transactions İn transparent environment

18. Adventages of Bonds by Issuer • Costs are certain and limited • Lower risks than stocks • Interest rates are discounted from tax base • Business owner do not share administration and audit with bond holder

19. Disadvantages of Bonds by Issuer Irregular earnings Not offset interest rate Risk for business

20. Disadvantages of Bonds by Issuer • Although financial leverage work well, in a high debt situation stock prices may fall • They cover long run and so risk • Because they are long run, they involve high judgements than short run.

21. Advantages of Investing Bond Market • Periodic interest payments • Predetermined quantity and date • Low risk • Trade before maturity

22. Globalization in Bond Market

23. BOND MARKET APPLICATION IN THE U.S. • World total bond market size(2008) $ 67 trillion • $33.5 trillion is belong to US bond market

24. BOND MARKET APPLICATION IN THE U.S. • The US government funds their borrowing through Treasury notes and Treasury bonds. • Treasury notes’ maturity is up to 10 years • Bonds are issued from 10 years to 30 years. • Both are issued in denominations of $1000 or more. • Semiannual interest payment called coupon payments • The New York Stock Exchange (NYSE) is the largest centralized bond market,mostly corporate bonds.

25. DAILY AVERAGE US BONDS VOLUME

26. US Market Size • Nearly 10% of all bonds outstanding are held directly by households • The US was the largest market for domestic bonds in 2008 (43% of amounts outstanding). • 25% were in mortgage backed bonds • 20% in corporate debt • 18% in Treasury bonds • Remainder in Federal Agency securities and municipal bonds

27. BOND MARKET APPLICATION IN THE TURKEY • Istanbul Stock Exchange (ISE) Bond Market includes • Government bonds, • Revenue indexed bonds, • Corporate bonds • Securities less than a year maturity called “Bills” which are offered at a discount and payable by the issuer at nominal value at the end of the term. • Government Debt Securities (GDS) as they are issued by the Undersecretariet of Treasury for domestic market. • Private sector bonds or “Corporate bonds” are issued by the joint stock companies. • Eurobond securities are also issued in Turkey

28. Market Patricipants in the Turkish Bond Market • Central Bank of Republic of Turkey • Registered Commercial Banks • Investment Banks and Brokerage Houses, • Classify two type of bond market, • Primarymarket-when the bonds are issued first by the Treasury- • Secondarymarket-bonds after first issues by the intermediary institutions-. • The most active organisation for bond trade is ISE Bond market by doing Outright purchases and sales market and repo and reverse repo market. • The Central Bank of Turkey also does Open Market Operationswith outright purchases and sales and Repo Reverse Repo in Secondary market.

29. Bond Market Instruments in Turkey • Kesin alım satım pazarı • TL ve dövize endeksli Devlet İç Borçlanma Senetleri (DİBS) • TL ve dövize endeksli Gelir Ortaklığı Senetleri • Gayrimenkul Sertifikaları • Borsa kotundaki özel sektör tahvilleri • Repo Ters Repo Pazarı

30. Bond-Bill-Repo-Reverse Repo Volumes Btw 2002-2008 (million TL)

31. 24 (!) RUSH HOUR IN THE BOND MARKET • 09:30Opening time of İstanbul Stock Exchange • Orders are transmitted via automated terminals or phone to the market on 212-298 22 22 –For the same day value transactions 09:30-14:00- For different dated value transactions 09:30-17:00 • 12:00-13:00 Midday break • If the order matches with the order appear in the screen,, the same or a better rated and appropriate sized orders should be transmitted • Transmitting order following 18.2.4 • To transmit of the best order to the screen automatically, to set in other orders giving priority to price and timing. • If the orders are executed, confirmation should be given to the counterpart and transmitting second degree orders to the screen • 14:00The market closes for the same day value transactions (Unexecuted orders are cancelled automatically) • Until 16:30, the parties settle their obligation for the same day value transactions. • 17:00 Market closing time.

32. OUTRIGHT PURCHASES AND SALES MARKETClassified by Government Securities and Corporate Securities over the period of 2000 and 2009. Government Securities Trading Volume Over Period of 2000-2009 Volume in US Dollar, ( Million) Source: Istanbul Stock Exchange

33. General Look to Turkish & US Bond Market [1]Source: Financial Times, S&P Downgrades Turkey’s Credit Rating, 14.November 2008 [2] Source: Istanbul Stock Exchange [3] Source: www.dailyfinance.com, Moody’s warning on the US Credit Rating. [4]Source: http://en.wikipedia.org/wiki/Bond_market