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What Is a Primary Bond Market?

Alex Newth
Alex Newth

A primary bond market is one in which new debt is issued in bond form. The bonds are sold to investors by the government or companies and, to ensure that they will get money back from the deal, issuers often consult an investment bank in setting the maturity date and the interest rate that investors earn. This is contrasted with the secondary bond market, in which bonds are sold by entities that purchased them from the primary market or from other secondary entities.

Many investors are familiar with the primary bond market, because most investors look to it when buying bonds. In this market, the sellers of bonds are companies, banks, the government and other entities. They are selling bonds to make immediate money, while investors are purchasing these bonds to earn a return years in the future, after the interest rate has made the bond’s value worth more than its buying value.

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Businessman giving a thumbs-up

In the primary bond market, every bond sold is new. This means the bonds have not been sold or issued to anyone else, and this is the first time they are being made. While this reduces the chances of someone being scammed by a fake bond, the price of these bonds often is higher than bonds from the secondary bond market.

When an entity decides to sell bonds on the primary bond market, it often will contact an investment bank, or one that specializes in investing. This is because many factors go into selling bonds, and the entity does not want to lose money on the deal. With this in mind, the investment bank will help the entity set a buying price and a face value, and determine the length of time before the bond matures and the annual interest rate investors receive. Some investment banks also assist the entity in selling the bonds.

Opposite of the primary bond market is the secondary bond market. In the secondary market, investors or entities that purchased bonds from the primary market or from someone else in the secondary market sell them to other investors. This often leads to lower prices, and sellers may make more on an immature bond than selling them back to the primary issuer. At the same time, this market tends to have more fraud than the primary market, and taxation may be different for the bonds.

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