Bond and deposit are the 2 basic, basic FI instruments, underlying most interest rate derivatives.
Both pay interest, therefore have accural basis, like act/360 or 30/360
Both have settlement conventions, such as T+2. Note Fed Fund deposit is T+0.
# 1 difference in pricing theories — Maturity value is know for a bond, but in contrast, for some important deposits (money-market deposits) we only know the total market value tomorrow, not beyond. Though many real life fixed-deposits have a long tenor comparable to bonds, the deposits used in pricing theories are “floating” overnight deposits.
# 2 difference — Bond has maturity value exactly $1 and is traded at a discount before maturity, making it an ideal enbodiment of discount factor. A Deposit starts at $1 and grows in value due to interest.
–1) Bonds
eg of bonds — all treasury debts, corp debts, muni debts.
Has secondary market
bonds are the most popular asset for repo.
–2) Deposits is fairly similar to zero bonds.
eg of deposit — Fed Fund deposit, or deposits under other central banks. Unsecured
eg of deposit — Eurodollar deposit, in about 20 major currencies. Unsecured
OIS is based on deposits (Fed Fund deposit)
Libor is based on eurodollar deposits, for a subset (5) of the currencies.
Libor IRS and OIS IRS – all based on deposits.
No secondary market.
I feel deposits tend to be short term (1Y or less)
