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What Is an Active Bond?

Jim B.
Jim B.

An active bond is any type of bond that can be easily traded on the exchange that contains it. These bonds tend to trade in great volume and, as a result, may trade with a relatively small margin between the bidding price and the asking price. A bond that is classified in this manner is often the focus of the so-called active bond crowd, who look to deal these debt instruments in great volumes. Many investors prefer these bonds because they provide excellent liquidity, meaning that they can easily be bought and sold if the need to do so suddenly arrives.

The bond market is a popular one for investors who would like to see some return on their initial investment but are also concerned with avoiding the risks of the stock market. Bonds are issued by institutions like governments or corporations and are used by the issuers as a means of funding. Investors in bonds are rewarded, on most occasions, with the return of their initial investments in addition to regular interest payments. A bond that is bought and sold frequently by investors is known as an active bond.

Man climbing a rope
Man climbing a rope

There are many advantages investors may take advantage of by purchasing an active bond. One of the main ones is a bid-ask spread that is relatively small. The bid-ask spread is the difference between the price that a buyer is willing to pay and the price that a seller will accept. Since these bonds are traded at great volume, buyers will usually be able to find a price that is beneficial to them.

In addition, an active bond, which is generally issued by a corporation, is a source of excellent liquidity in a portfolio. Whereas some securities might be difficult to unload at a moment’s notice, active bonds, due to the frequency with which they are traded, can be bought and sold with relative ease. As a result, an investor holding one of these bonds in need of some quick cash can sell the bond without much delay.

Certain investors trade these bonds in great volume. These investors are known as the active bond crowd. They trade these bonds with such regularity that their actions can actually affect the prices of the bonds. Investors can choose one or a few of these bonds as individual investments, or they can get involved with them through a bond fund specializing in them. Bond funds can provide great diversity in addition to all of the other benefits associated with active bonds.

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