The bond market is a financial market where participants buy and sell debt securities, usually in the form of bonds. Bond Market is composed of Treasury bond, Municipal Bond and Corporate Bond. This is of two kinds- Organized and OTC markets. There are various types of bond products depending on provisions, maturities, coupon rate, options, convertibility, etc. Bond Market in Bangladesh is dominated by treasury debt securities. It has now only one corporate bond; but does not have any municipal bond/debenture. In recent years, around 70 percent of the domestic savings are held in the form of bank deposits, while only 30 percent are investments in the debt market which is entirely dominated by government instruments. There hardly exists a corporate bond market in the country, it has a debenture market with only a small number f well-known issuers. As of today, only one corporate bond has been floated.
History of bond market of Bangladesh:
Before independence, the use of bonds as a means of resource mobilization was virtually non-existent in Bangladesh. Immediately after liberation, the government of Bangladesh reissued long-term bonds accepting the liabilities of the Income Tax Bonds and the Defense Bonds of the Pakistan government held by Bangladeshi nationals and institutions. The government also issued a 5% non-negotiable bond to Bangladeshi shareholders of nationalized industries. In addition, savings bonds were also issued to pay for the value of demonetized 100-taka notes in 1974. Most of these bonds are held by Bangladesh bank. The first effort to mobilize savings for use of development expenditure was the issue of Wage Earners Development Bonds in 1981 to be sold to Bangladeshi wage earners abroad. Later, a two-year special treasury bond was issued in January 1984 to be sold to individuals, public and private sector organizations including banks. In December 1985, another instrument, the National Bond, was issued to be sold to non-bank investors. During the implementation period of the financial sector reform programmed that took effect from 1990, Nationalized commercial banks, specialized banks and development financial institutions had to make considerable provisions for huge classified loans. As a result, the capital base of those banks and financial institutions eroded severely and their viability was seriously threatened. In this situation, the government issued a series of bonds to restructure the capital base of these banks and financial institutions as well as to assume the liabilities of the bad loans made to a number of public sector organizations. The government also issued some bonds for augmenting loan able funds for specialized bank sand financial institutions. Moreover, some bonds were also issued to mobilize funds for a number of public sector organizations like the T&T Board, Bangladesh Biman etc.
Types of bonds:
On the basis of Variability of Coupon:
Zero Coupon Bonds
Zero Coupon Bonds are issued at a discount to their face value and at the time of maturity, the principal/face value is repaid to the holders. No interest (coupon) is paid to the holders and hence, there are no cash inflows in zero coupon bonds. The difference between issue price (discounted price) and redeemable price (face value) itself acts as interest to holders. 2.
Floating Rate Bonds
In some bonds, fixed coupon rate to be provided to the holders is not specified. Instead, the coupon rate keeps fluctuating from time to time, with reference to a benchmark rate. Such types of bonds are referred to as Floating Rate Bonds. These bonds are known as Inverse Floaters and are common in developed markets. On the Basis of Variability of Maturity:
These securities have provisions allowing the issuer to redeem the issue prior to the scheduled maturity date 2.
The holder of a puttable bond has the right (but not an obligation) to seek redemption(sell)...
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