Bonds

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Bond issuer

Duration

Price of bonds

Face value of bonds

Frequency of interest payments

Country risk

Foreign exchange risk

Sector (industry) related risk

Sector is an industry or market, in which the participating companies have similar operational traits.

Investors tend to invest in companies of specific industries in order to achieve their financial goals. Despite the instability, investing in companies of other industries may result larger returns. Investing in several sector concerns investors with larger risk appetite.

Services sector

The services sector deals with the “production” of immaterial goods. Instead of goods, these firms provide services. It has numerous branches, such as warehousing, transporting, information services, investment services, professional-, technical-, scientific services, waste management services, healthcare and social services, arts, entertainment, and leisure services.

The social development and the wealth accumulation of citizens have enabled developed countries to extend their services network and provide high quality services.

The USA, the United Kingdom, Australia, and China emphasise their services sectors. In the US, the ISM monthly index indicates the business activities in the services sector.

Services are currently the leading sector: 61% of the world’s GDP is produced in this sector.

Walt Disney is a good example of the services sector.

Industrial Goods sector

Industrial goods are used in the construction and manufacturing sectors. Businesses in the manufacturing sector mostly deal with aircraft production, military equipment production, industrial machines and tools production, and construction. Cement and steel production belong to this sector as well. The performance of the manufacturing sector largely depends on the demand and supply of the constructions on the real estate market.

The sector’s cyclicality can be divided into two parts: accelerated or slowing growth and shrinkage. The best investment opportunities are in the accelerated growth and in the slowing shrinkage phases.

Governmental expenditures are especially important in this sector, as plenty of funds flow to businesses this way. Governments are big customers in the aerospace and military industries, and of the road, railway, and transportation infrastructure. The military and infrastructural investments are especially important within the sector.

Many of the biggest firms in the US all operate in the manufacturing sector. Examples include General Electric (GE), Boeing, and Caterpillar.

Consumer goods sector

Consumer goods sector includes firms providing fast moving consumer goods (FMCG), packaged goods, clothing, beverages, vehicles and electronics.

The performance of the sector depends on the consumers’ behaviour.

The biggest American firms of this sector include Apple, Coca Cola, and Nike.

Basic Materials sector

The decisions of the clients of the firms in this sector are determined primarily by prices.

The income of the participating firms is defined by the commodity prices of basic materials, driven by supply and demand.

In the basic materials sector, a firm can gain competitive advantage when it can produce with low operating costs relative to other firms. The storage of materials, their access, and efficient production methods are the most common keys to success. Only a few firms can create these advantages, thus there are relatively few businesses competing in this sector.

This market is excessively cyclical. In times of flourishment, enormous amounts of funds flow into the sector, while in times of recession, many firms may shut down. A recession can affect firms with high operating costs more than the ones with competitive advantages.

The biggest American firms in the sector are Exxon Mobil, BHP Billiton and Alcoa.

Energy sector

In the past 15 years, renewable energy became the most dynamically growing segment of the energy sector. The increasing concern for climate change, the striving for energy security, the peak of the oil yield, the emergence of new technologies, and the appearance of environmentally conscious consumers are all factors responsible for the increase of the sector.

The price of raw materials influences the revenues in the sector, thus the sector is characterised by cyclicality and the profitability of the participating firms can be unstable.

Financial sector

Financial instruments currently not in use and accessible either in short or long term, are collected on the financial markets.

The financial sector is the place of exchanging money and the collection of players (individuals and institutes), financial instruments, mechanisms, regulations, regulators, and customs.

The sector’s primary task is to transmit available financial instruments (or savings) to the users of the funds.

Therefore, on the financial market, funds change hands in different times.

The main institutions of the financial sector are the following:

Commercial banks: financial institutes with the broadest profile, they deal with almost all kinds of banking activities.

Depository institutes: they transform savings into long-term credit resources (e.g. savings banks financing housing constructions).

Insurances, pension funds: their main function is to pay compensations from the collected funds, or to make pension payments to the customers. To ensure the high-quality service, they need to invest the collected funds securely and profitably. The revenues, expenses, and the available financial instruments of pension funds are easy to quantify even in long term. Thus, they have the opportunity to invest in long-term with high yields, primarily in corporate bonds and shares.

Investment firms and investment funds: they specialise in collecting small funds from many small individuals intending to purchase shares. They invest the collected savings profitably with expertise and low transaction costs.

Financing firms: their revenues are from issuing shares and from loans. The capital acquired this way is then used to provide small, short-term consumer loans or business loans.

Other intermediary financial institutes: state agencies and institutions, brokerages, mortgage banks, and leasing companies.

Companies in the financial sector are heavily influenced by economic processes. They usually acquire capital by issuing new shares, weakening the existing shareholders’ ownership in the firm.

The biggest financial businesses are for example the Citigroup, the MasterCard or the JPMorgan.

Healthcare sector

Healthcare is one of the few sectors that are related directly to human survival. New medical innovations can improve or extend patients’ lives.

The sector has gone through an energetic growth phase in the past decade, especially in the United States. The pace of the growth has slowed down in the past few years. According to current trends, one can expect a decrease in the pace of growth of the sector. However, in the long term, the sector will remain powerful.

Healthcare includes all activities with the intension of

  • preserving,
  • restoring,
  • stabilising one’s health.

This sector is analysed, because the curing of people may rise many problems that can be solved by the different methodologies of economics.

Healthcare is a broad term, because apart from the healthcare system it also involves

  • the production of pharmaceuticals,
  • the pharmaceutical commerce,
  • the manufacture and wholesale of medical aids,
  • the financial and insurance supports related to incapacity of work,
  • the biotechnology researches.

The biggest healthcare firms in the US are Johnson & Johnson, Pfizer and Sanofi.

Technology sector

IT is without doubt the sector that went through the biggest development in the past few decades.

Firms providing research and development (R&D) and technology-based services and products are the participants of the sector. Their activities include the hardware, the software, and the semiconductor industry.

The rapid development of technology makes it difficult to companies to gain sustainable competitive advantage in the sector. There is a huge potential in the industry, as the development is continuous.

The biggest American IT companies are Google, Cisco, and Microsoft.

Utilities sector

Utilities firms own developed infrastructures. Thus, they have large debts and are sensitive to interest rate changes. An increase in interest rate enlarges the capital expenses of the firms.

The biggest danger in the sector is the spread of renewable energy, which threatens the traditional utility usage levels.

Utilities firms are typically holdings, and they include the distribution, the production of electricity, and its infrastructure.

The biggest utilities companies are Duke Energy, American Electric Power and Westar Energy in the United States.

Bond credit rating

Coupons

Bond interest rate

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