ABSTRACT
This chapter looks in more detail at the capital market’s fixed-income segment, the bond market, by discussing the fundamentals and the valuation of bond instruments. The international bond market comprises the foreign bond and the Eurobond markets. A floating-rate bond makes variable interest payments; its coupon rate is tied to a market interest rate or a reference rate plus a spread. The junk-bond market flourished in the 1980s when this alternative means of financing became the fashion before it fell out of favor. The result can be a market distortion that has people jumping to the wrong conclusion about the likelihood of a recession. Stated differently, the yield curve represents the cost of money for all market traders. The Market Flash box explains why a steepening of the yield curve may not always signal good news for investors.
