The Credit Market is not an actual place but an abstract idea which refers to buying and selling of fixed income securities. Fixed income or debt securities are financial instruments collateralized by some type of loan or credit instrument. These securities and their derivatives are bought and sold by investors to derive the income provided or for speculative purposes. The difference between the domestic and global credit market is that the latter includes all international buyers and sellers of fixed income instruments.

The credit markets can be divided into categories around the specific instrument being exchanged or by different characteristics of the securities or the investors that trade them. For example, the bond market is a subset of the credit market that relates to the exchange of bond instruments. Bonds are debt instruments issued by company’s or finance instructions to raise debt capital. With a bond a company or municipality is the borrower and investors are the lender. Once the bond is issued, the value of the bond can change due to changes in interest rates or perceived risk. Investors can trade these bonds to receive the interest payments or to take advantage of the change in value. Although certain exchanges have a bond market, the overall bond market is just a subset of the overall credit market.

There are a large variety of different fixed income investments that are traded in the credit markets. Treasury securities, commercial paper, and other interbank debt is traded in the short term market. Mortgages and securities backed by debts such as credit cards are part of the asset backed securities market. Credit that backed by questionable credit is called junk and is traded in the junk bond market. These bonds provide inventors with a significant interest income to cover the risks involved. Although the junk bond market attracts a very different type of clientele than the corporate market, it is all considered part of the overall credit market

The one thing that all investors in the credit market have in common is that they are taking credit risk in order to receive a return on their investment. Unlike equities that provide investors with a direct ownership share in company assets, credit instruments are secured by the credit of the lender. However, in the event of bankruptcy creditors have first in line for company assets ahead of owners.

Credit risk or default risk relates to the probability that a borrower will repay its debt obligations. Even credit derivatives, like credit default swaps a type of credit insurance, will change in value in accordance with the change in the credit of the borrowing institution. Unlike the equity market, the value of debt based investments have limited upside potential. This is because the value of these instruments only goes up when credit ratings increase and when interest rates decline. Since there is a limit to how far interest rates can drop and credit ratings can rise, there is a limit to how much the value of a credit instrument can rise.

Most credit instruments are traded on yield and not price. Yield refers to the amount that an investor should receive over the maturity of the instrument. In the credit markets the yield of a financial instrument changes over time. The yield curve which is the change in yield for a given change in maturity provides the risk-return comparison for instruments exchanged in the credit markets.