What Is a Secondary Bond Market?
The secondary bond market is a trading platform where bonds are resold among investors after they have already been released by the issuing companies or government. Since this financial market is involved in already issued bonds that are a form of debt taken on by the issuer, the secondary bond market is often referred to as a debt market. The secondary market for financial instruments like bonds exists outside of normal trading exchanges for stocks due to the fact that bonds are more diverse. While stocks are only issued by companies generally as either common or preferred stock, bonds can span across a wide range of maturity dates and yields. This results in the secondary bond market more often than not being an over-the-counter (OTC) market that exists outside of major exchange locations like New York, London, or Tokyo, and is instead conducted electronically, either by telephone, fax, or Internet.
Another primary reason that securities like bonds are traded more frequently on the secondary bond market is due to the fact that there can be considerable lag in valuing them. Stock values are updated on a moment-by-moment basis based on trading activity, where bonds are tied to interest rates and credit worthiness of the companies releasing them, at the time they were released. Since they can be traded many days or weeks after this release, fluctuating values in economic indicators can change their net worth in unpredictable ways. This makes the process of listing the current value of a bond on a trading market at any one time difficult since it is affected directly by the larger issue of the fluctuating economy.
When bonds are sold by one investor to another in the secondary bond market, the company that issued the bonds has no financial involvement in the process. This is because the bonds are not technically being cashed in and have not reached their maturity date, but instead are just changing hands from investor to investor. When bonds are sold in this manner, however, it is, in effect, a reissuing of them from one investor to another because the resale value that they hold and the interest payment that they offer once mature is based on current rates on the day that they change hands from investor to investor, not the original conditions that existed when the company issued them itself.
This revaluing factor is what makes the secondary bond market so large and appealing to speculators, as it is a way to increase the value of bonds based on favorable economic changes. This activity, which can also include the trading of stocks, options, and futures on the secondary market, stimulates the movement of capital overall in an economy and is seen as a positive contributor to it. The securities market also benefits from the secondary bond market because many bonds have very long maturity dates of 25 years or more, and investors that don't wish to hold them for such a period can trade them on the secondary market instead of waiting for them to mature properly.
Discuss this Article
Post your comments