Bonds in Financial Markets

Bonds in Financial Markets
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Bonds in Financial Markets
Introduction
Financial markets are a marketplace facilitating the trading of assets such as derivatives, foreign exchange, stocks, and bonds. Investors and businesses seek to make more money or raise capital to grow their businesses. Financial markets consist of capital and money markets (Narayanaswamy, Blitzer, & Carvajal, 2017). The bond market is in the latter category. Money markets deal with instruments of maturities of a year or less or debt securities. Although the stock market is usually the most predominant and popular, the bond market plays a fundamental role in the financial system.
The importance of the bond market is apparent in the fact that it is has been larger than the stock market for approximately 3 decades (Hollingsworth & Liner, 2016). This position is imminent because of the high inclinations towards a credit from various economic players and besides, this pattern is an element of behavioral economics.
An intricate analysis of the Hong Kong market indicates that investors are much more likely to place their trade through banks rather than the Stock Exchange of Hong Kong Limited (SEHK). The preferences are a result of a couple of reasons that are predominantly bent on the services that both institutions offer. First and foremost, there is the case of diversity in the sense that SEHK is under-capacitated in meeting these criteria. The second compelling reason is the fact that bond trades are significantly higher amount-wise in comparison to stock trades. The probable final aspect is that bonds are traded less frequently than stocks. Bonds are highly traded in banks than SEHK, where most would expect, considering their specific attributes, which fail to align with the providences of SEHK. However, the chief executive offer at SEHK can help alleviate the problem of information asymmetry concerning bonds to attract more investors to trade through the exchange.
Diversity
Chief among the reasons bonds are traded through banks rather than SEHK is because of their diversity. Diversity arises in the fact that they elicit different yields, maturities, and qualities. Bonds are unlike the company’s stocks. A company such as HSBC Holdings plc, which trades at SEHK has a single stock, but then could have more than a thousand types of bonds with the specifics mentioned above that could extend to currency denominations. A report indicates that as of the end of 2019, 2,449 companies were incorporated at SEHK (Statista Research Department, 2020). This figure translates to approximately hundreds of thousands of different bonds. These are very many transactions particularly if the public’s input is integrated into the equation. Consequently, related exchanges and efficiency in their success would be an enormous feat for the financial system. The underlying difficultness is a major reason for their exclusion from the trading exchange platform.
Bond Size and Price
Another aspect that guarantees bonds are sold in banks rather than at SEHK is that they are quite large; they are typically larger compared to stock trades. Hollingsworth and Liner (2016) argue that “the average size of a stock trade is...