- CFA Exams
- 2023 Level I
- Topic 6. Fixed Income
- Learning Module 43. Fixed-Income Markets: Issuance, Trading, and Funding
- Subject 2. Primary and Secondary Bond Markets
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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.
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.
User Contributed Comments 2
|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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