Bonds
This isn't your dad's bond market. These days, arbitrage can turn bond yields into a hot, sexy topic."
Arbitrage Opportunities In the Bond Market
Arbitrage refers to buying an instrument or a commodity in one market and simultaneously selling it in another, making clear and risk less profit.
A person who makes risk less profit by using market inefficiencies
is called an arbitrageur.
Arbitrage opportunities are available when markets are not efficient.
Consider a 1 year maturity bond with face value of Rs100, coupon rate
of 10%, paying coupon semi annually and bank interest rate is 5% pa.
Present value of the cash flows from this bond is
5/1.025 + 105/(1.025)2 = 104.82
If price of this bond is Rs100 in the market, one can borrow Rs100 from
a bank and buy this bond.He will be able to pay Rs5 once he receives
first coupon on this bond. By this time his outstanding amount will be
97.5 (100+100*2.5/100 - 5). At the end of one year he will receive
Rs105 (principal + last coupon) which can be used to pay bank's debt of
Rs99.94 (97.5*1.025). He will make risk less profit of Rs 5.06
To exploit this situation every one tries to buy this bond by borrowing
from banks to get risk less profit. As the demand for this bond
increases the price also increases gradually to an extent that there
won't be any arbitrage opportunity. This happens in very less time in
an efficient market giving less time for arbitragers to act.
by Satya
http://lastbull.com
Surety Bonds - Market Fluctuations & Stability
Many people tend to confuse the stability of surety bonds with the state of the bond market itself. Actually, these two items are completely different. Stability of the surety bond market depends on attaining and holding a strong position in the market. In the surety bond market, periodic fluctuations inevitably occur, and changes are difficult to predict. Overall the surety bond market is stable - it's almost a cliche.
Most people tend to purchase surety bonds from a bonding company. Surety bonds are of various types, issued in different bond forms and amounts according to the requirements of the buyer. The principal guarantees the obligee that he will satisfy the terms of the bond without default. When stability of surety bond market is high, more surety bonds are issued to the general public. Historically, industrial companies started issuing surety bond to its members to protect the obligee against any unforeseen act or default act by the principal.
An example might be that a contractor enters in to an agreement and does not complete the work according to the terms. When basic requirements are legally compiled in the market, then the position of the surety bond market will be constant. Sometimes they obtain payment from the obligee and fail to perform the work, or sometimes the principal fails to make any payment to the subcontractors for the labor and material supplied. In each of these cases, when a surety bond is obtained from the principal, the obligee can claim for damages or losses inccurred. The stability of surety bond market is sometimes difficult to ascertain, but it is easy to gauge the stability of the bonds themselves.
