- There are many different kinds of bonds.
There are government bonds that are issued by countries,
these are sometimes called sovereign bonds.
The United States government has issued many, many bonds.
There are also municipal bonds,
sometimes called sub-sovereign bonds
issued by cities or provinces
or states or government agencies.
These municipal bonds are ways for local governments
to borrow money.
And there are corporate bonds which are issued by companies.
About 30% of the bonds outstanding in the world
are issued by companies.
Some bonds are called asset-backed bonds.
These are quite interesting things.
These asset-backed bonds are backed by a set of assets,
maybe a company's accounts receivable
or a set of mortgages on residential homes.
Somebody has gathered ownership of these things together,
these mortgages or these accounts receivable,
and then they make some bonds and say
these bonds will be repaid with the proceeds
from the accounts receivable
or from the proceeds from these mortgages.
This process of bundling the cash flows
from these assets is called securitization.
And this all sounds very nice, straight forward, and safe.
But, asset-backed bonds, securitization of mortgage loans,
for example, helped to bring down
the entire world economy in 2008
when the assets that were backing those bonds
proved not to be as strong as they had
originally been expected to be.
Now, not all corporate borrowing, by the way,
is through bonds.
Corporate bonds issued by a company
are referred to as being that company's public debt.
Most corporate borrowing happens privately
through private arrangements,
such as borrowing directly from banks
or from a consortium of banks.
This is called a company's private debt.
If there are stock markets, are there also bond markets?
Well, yes, there are bond markets,
but most corporate bond trading is done over-the-counter,
which means that the bond trades are arranged individually.
Somebody's got a bond and they want to sell it,
so they call a dealer or a broker or an investment bank
who finds a buyer and the trade happens directly.
This is called over-the-counter trading.
Now, why are bonds done over-the-counter?
Well, with stocks, there are only, in the United States,
about nine or ten thousand publicly traded stocks
and all stocks of a certain company are the same.
So a share of stock in a given company
is a homogenous commodity.
It's easy to trade stocks.
With bonds, on the other hand,
there are tens of thousands of companies
that have issued bonds in the United States
and those bonds have different characteristics.
When I say I want a bond of AT&T, well, which AT&T bond?
There are many, many different bonds of AT&T,
or many, many different bonds of General Motors,
all with different characteristics,
such as interest rates, maturity dates,
and collateral privileges.
So there are lots of different kinds of bonds,
even for the same company.
The market for bonds is just a much more complex market.
Now, for most bonds, the trading is said to be thin,
meaning that days could go by
and there are no trades for that bond.
Even with most infrequently traded stocks,
trades pretty much happen every single day,
but sometimes bonds don't trade for days or weeks on end,
so bond market trading is done more over-the-counter,
where the trades are individually arranged
by a broker who puts together the seller of the bond
and the buyer of the bond.