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Subject 2. Primary and Secondary Bond Markets PDF Download
In primary bond markets issuers first sell bonds to investors to raise capital. In secondary bond markets investors trade existing bonds.

Primary Bond Markets


  • The sale of new government bonds by the U.S. Treasury to finance a government deficit
  • A $100 million bond issue by P&G to finance the construction of a new soap production plant

There are two mechanisms for issuing a bond in primary markets.

Public Offering

Any member of the public may buy the bonds in a public offering.

  • Underwritten offerings. The function of buying the bonds from the issuer is called the underwriting. An investment bank (called the underwriter) takes the risk of buying the whole issue as firm commitment underwriting. It makes a profit by selling the bonds for more than what it paid for them.

    There are six phases: the determination of the funding needs, the selection of the underwriter, the structuring and announcement of the bond offering, pricing, issuance, and closing.

  • Best effort offerings. The investment bank serves only as a broker to sell the bonds. It agrees to do its best, receives a commission for selling the bonds and incurs less risk associated with selling the bonds.

  • Shelf registrations. An issuer files the bond registration with regulators before it makes an actual public offering of the issue. The issuer may be able to offer additional bonds to the general public without preparing a new and separate offering circular.

  • Auctions. The issuer announces the terms of the issue and interested parties submit bids for it. Auctions often yield the most money for the issue. They allow the issuer to sell directly to the public, eliminating the underwriting fee. In major developed bond markets, newly-issued sovereign bonds are most often sold to the public via auction.

Private Placement

A private placement bond is a non-underwritten, unregistered corporate bond sold directly to a single investor or a small group of investors. Because the bonds are not registered, SEC regulations require firms to offer such bonds privately only to investors deemed sophisticated: insurance companies, pension funds, banks, and endowments.

Secondary Bond Markets

The secondary market arises after issue, when bonds are sold from one bondholder to another. Its purpose is to provide liquidity - ease or speed in trading a bond at price close to its fair market value. The buying and selling of existing bond issues is done primarily through a network of brokers and dealers who operate through organized exchanges and over-the-counter (OTC) markets. Most bonds are traded in OTC markets.

Corporate bonds typically settle on a T + 3 basis. Government and quasi-government bonds typically settle at T + 1.

Learning Outcome Statements

c. describe mechanisms available for issuing bonds in primary markets;

d. describe secondary markets for bonds;

CFA® 2021 Level I Curriculum, 2021, Volume 5, Reading 43

User Contributed Comments 2

User Comment
Kiniry The last sentence applies to capital market bonds. Money Market bonds typically settle on the same day that they are traded.
zriddle At the end of 2017 Corporate bonds and other securities switched to T + 2 settlement. Government is still T + 1.
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I passed! I did not get a chance to tell you before the exam - but your site was excellent. I will definitely take it next year for Level II.
Tamara Schultz

Tamara Schultz

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