115 CFA
File: Fixed Income - Reading 43 - 2. Primary and Secondary Bond Markets

2. Primary and Secondary Bond Markets

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

d. describe secondary markets for bonds;

What is the difference between a primary and secondary bond market?
In primary bond markets issuers first sell bonds to investors to raise capital. In secondary bond markets investors trade existing bonds.

What are the two mechanisms for offering 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.

In a public bond offering, what is an underwritten offering?
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.

In a public bond offering, what is a Best effort offering?
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.

In a public bond offering, what is a Shelf registration?
An issuer files the bond registration with regulators before it makes an actual public offering of the issue.

In a public bond offering, what is an Auction?
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.

What is the Secondary bond market? What is the purpose?
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.

  • CFA