In ancient
Sumer, temples functioned both as places of worship and as banks, under the oversight of the priests and the ruler. Loans were made at a customary fixed 20% interest rate; this custom was continued in
Babylon,
Mesopotamia and written into the
Code of Hammurabi. The first known bond in history dates from circa 2400BC in
Nippur,
Mesopotamia (modern-day
Iraq). It guaranteed the payment of grain by the principal. The surety bond guaranteed reimbursement if the principal failed to make payment. Corn (grain) was often the currency priced. In these ancient times, loans were initially made in cattle or grain from which interest could be paid from growing the herd or crop and returning a portion to the lender. Silver became popular as it was less perishable and allowed large values to be transported more easily, but unlike cattle or grain could not naturally produce interest. Taxation derived from human labor evolved as a solution to this problem. By the
Plantagenet era, the
English Crown had long-standing links with Italian financiers and merchants such as
Riccardi of Lucca in Tuscany. These trade links were based on loans, similar to modern-day
Bank loans; other loans were linked to the need to finance the
Crusades and the city-states of Italy found themselves - uniquely - at the intersection of international trade, finance and religion. The loans of the time were however not yet securitized in the form of bonds. That innovation came from further north:
Venice. In 12th Century Venice, the city-state's government began issuing war-bonds known as
prestiti, perpetuities paying a fixed rate of 5% These were initially regarded with suspicion but the ability to buy and sell them became regarded as valuable. Securities of this late medieval period were priced with techniques very similar to those used in modern-day
Quantitative finance. The bond market had begun. Following the
Hundred Years' War, monarchs of
England and
France defaulted on very large debts to Venetian bankers causing a collapse of the system of
Lombard banking in 1345. This economic set-back
hit every part of economic life - including clothing, food and hygiene - and during the ensuing
Black Death the European economy and bond market were depleted even further. Venice banned its bankers from trading government debt but the idea of debt as a tradable instrument and thus the bond market endured. With their origins in antiquity, bonds are much older than the equity market which appeared with the first ever joint-stock corporation the
Dutch East India Company in 1602 (although some scholars argue that something similar to the joint-stock corporation existed in Ancient Rome). The first-ever
sovereign bond was issued in 1693 by the newly formed
Bank of England. This bond was used to fund conflict with
France. Other European governments followed suit. The U.S.A. first issued sovereign
Treasury bonds to finance the
American Revolutionary War. Sovereign debt ("
Liberty Bonds") was again used to finance its
World War I efforts and issued in 1917 shortly after the U.S. declared war on Germany. Each maturity of bond (one-year, two-year, five-year and so on) was thought of as a separate market until the mid-1970s when traders at
Salomon Brothers began
drawing a curve through their yields. This innovation - the
yield curve - transformed the way bonds were both priced and traded and paved the way for
quantitative finance to flourish. Starting in the late 1970s, non-investment grade public companies were allowed to issue corporate debt. The next innovation was the advent of
derivatives in the 1980s and onwards, which saw the creation of
collateralized debt obligations,
residential mortgage-backed securities and the advent of the
structured products industry. ==See also==