Fixed-Income Issuance and Trading: Explains Primary vs. Secondary Markets and Public Offerings vs. Private Placements with clear explanations, key formulas, and worked examples, plus practice questions with explanations for CFA Level 1.
If you’ve already peeked at Section 7.1 or 7.2, you might remember we talked about bond features and valuations. Now we’re venturing into the actual mechanics of selling those bonds.
Okay, so maybe that doesn’t sound too complicated, but let’s emphasize something: the primary market is crucial. It’s how issuers actually raise funds to build bridges, open new plants, or sometimes pay off older debts. Investors considering a primary market transaction must rely on the issuer’s creditworthiness, the structure of the deal, and of course, the yield. After that, in the secondary market, different forces come into play—liquidity, trading volumes, interest rate movements, credit rating changes, etc. All these factors influence bond prices.
Think of the primary market as the “birth” of a bond. The issuer crafts prospectuses, engages underwriters, and tries to set an attractive price (or yield) to appeal to investors. The secondary market is basically the “life” of the bond, allowing it to change hands (hopefully many times) at different price points until maturity or call.
Now, how do bonds actually enter the market? Typically, we talk about public offerings versus private placements:
Public Offerings: These are widely marketed to the general investing public. For instance, a large corporation might issue a new bond that’s open for subscription by institutions, high-net-worth individuals, and sometimes even retail investors. Public offerings require detailed disclosures, regulatory filings, and a formal prospectus.
Private Placements: These are sold to a small group of select investors (often institutional). This method has fewer disclosure requirements and is more flexible, but the trade-off is that you typically can’t just go buy these private bonds as a retail investor. They’re “private,” after all. Private placements can sometimes be an efficient way for smaller entities, or those with a unique business model, to raise funds without the expense and complexity of a full-blown public issue.
I once had a friend—well, let’s call him Darren—who invested in a private placement bond from a local manufacturing firm. He was all excited about the favorable yield. But guess what? Two years later, he needed liquidity and realized that this bond didn’t trade on any secondary market. He learned the hard way that private placements can be illiquid, and dumping them early can be tricky (or downright impossible). Lesson learned: we must always weigh the cost-benefit of lower disclosure and potentially higher yields vs. the inconvenience of low liquidity in private placements.
When an issuer wants to raise capital through a bond issuance, they usually work with underwriters — typically investment banks or bank syndicates. These folks help structure the bond, set the interest rate or coupon, and price it for the market. If the issue is quite large, the underwriter often forms a syndicate—a group of banks that share the risk (and rewards) of placing the new bonds with investors.
Ever wonder how the coupon rate or yield of a new bond is decided? That’s where book-building comes in. The underwriter (or lead manager) reaches out to potential investors, collecting “orders” or indications of interest—basically asking, “Hey, would you buy, say, $10 million of this new 5-year bond if it yields around 4%?” By gathering these responses, the underwriter determines:
Based on investor feedback, they might tweak the yield slightly. Once the book (i.e., list of potential orders) is sufficiently filled, the underwriter finalizes the pricing. And voila, the new bond is ready to be born. That moment can be quite dramatic—like the moment your favorite sports team recruits a new player and announces them to the world.
The process for government bonds is similar, but there is often a more standardized auction approach. Sovereigns (federal governments) might hold a Treasury auction where investors (including primary dealers and big institutional investors) submit bids on the yield they’re willing to accept. Then the government sets a “stop-out” rate and all successful bidders get the bond at (or around) that yield.
These auctions can be competitive (where bidders specify the yield or price they want) or non-competitive (where smaller investors simply accept the yield determined by the auction). Auctions are common for U.S. Treasuries, British Gilts, Japanese Government Bonds (JGBs), etc. They’re typically well covered in the financial press, so you can actually see in real-time whether demand for a country’s debt is strong or weak.
I still remember my finance professor telling me to watch U.S. Treasury auctions to see how the market is feeling about macroeconomic conditions. For instance, high demand in an auction might indicate investor preference for “safe” assets, possibly reflecting uncertainty or concern about riskier markets.
Now let’s talk about the secondary market, where the vast majority of bond trading takes place. Corporate and government bonds typically do not trade on a centralized exchange like equities (with a few exceptions). Instead, they are bought and sold through over-the-counter (OTC) markets. This usually involves direct communication—via phone or electronic messaging—between buyers and sellers (or broker-dealers representing them).
While OTC remains the dominant platform, there’s a shift toward more electronic trading for improved transparency, smaller transaction costs, and faster execution. That said, the bond market is still more fragmented than the stock market, and liquidity can vary from one bond to another.
There’s been a notable movement toward electronic trading platforms over the last decade. These platforms aim to centralize quotes and bids, making it easier for institutions to find counter-parties and trade bonds. Sometimes referred to as electronic communication networks (ECNs) for bonds, these platforms can provide:
Despite this, the market is still quite different from an equity exchange. Many larger trades are still negotiated privately, especially for corporate bonds, where the issue size could be smaller, or there are unique features that make the bond less liquid.
Keep in mind: not all bonds are created equal in terms of liquidity. Some major government bonds (like U.S. Treasuries, German Bunds) are extremely liquid, meaning you can buy or sell them with minimal price impact. Meanwhile, a small corporate bond issue might barely trade at all after the initial sale in the primary market.
Just as I mentioned with my friend Darren, liquidity can be a huge factor if you’re an investor who might need to offload your holdings in a hurry. The less liquid a bond is, the wider the spread you might face and the more difficulty you might have finding a ready buyer.
Bonds can be quoted in three common ways:
You might also hear about “bid” and “offer” spreads—where the “bid” is the price at which the dealer will buy your bond, and the “offer” (or ask) is the price at which they’ll sell the bond to you. The difference (bid-offer spread) is smaller for highly liquid bonds (like treasuries) and larger for less liquid ones.
If you look at a bond screen on a Bloomberg terminal (or any bond trading platform), you might see multiple quotes for the same bond from different dealers, each with slightly different prices. This phenomenon occurs precisely because the OTC market is decentralized.
Below is a simple Mermaid diagram showing the journey of a bond from issuance in the primary market to investor trades in the secondary market.
flowchart LR
A["Issuer <br/> (Corp or Gov)"] --> B["Underwriter <br/> (Investment Bank)"]
B["Underwriter <br/> (Investment Bank)"] --> C["Primary Investors <br/> (Initial Buy)"]
C["Primary Investors <br/> (Initial Buy)"] --> D["Secondary Market <br/> (OTC or Electronic)"]
D["Secondary Market <br/> (OTC or Electronic)"] --> E["Other Investors <br/> (Trades)"]
In this simplified flow:
Case Study: Apple Inc. Bond Issuance: Apple, known for strong credit ratings, might bring a multi-billion-dollar bond issue to market. Underwriters collect indications of interest. Demand is huge due to Apple’s reputation, so the coupon might be relatively low. Once issued, these bonds often trade frequently in the secondary market. Liquidity is generally good because it’s a large, well-known issuer.
Case Study: Emerging Market Government Bonds: Let’s say the government of Country X issues new sovereign bonds denominated in U.S. dollars. They do an auction or a roadshow to meet with global investors for book-building. Once priced, the bonds might trade heavily at first—especially if big hedge funds want in or out quickly. After some months, liquidity might thin if the country is smaller or overshadowed by bigger markets.
Case Study: Private Placement by a Real Estate Group: RRG (Random Real Estate Group) does a private placement, offering 7% annual yield to just 10 large institutional investors. Because there’s no broad marketing or exchange listing, the transaction costs are lower for the issuer, but the secondary market is practically nonexistent. This structure appeals to institutional investors who plan to hold the bond until maturity.
Best practices include thorough research on the issuer’s creditworthiness, a strong understanding of the current interest rate environment, comparison shopping among different bonds, and paying attention to the size of the issue (which often correlates with liquidity). Conducting stress tests (e.g., how does the bond hold up if interest rates jump 1%) is also wise.
If you want to dive deeper, here are a few places to continue your journey:
Anyway, that’s the gist. At this point, hopefully you have a stronger grasp of how a bond gets issued and how it typically trades afterward. Remember, the bond market, large as it is, can seem mysterious, but it’s really a network of issuers, underwriters, and investors, all bound together by the desire to lend and borrow money under mutually beneficial terms.
Happy studying! Bonds may not always garner the media attention that flashy stocks or crypto tokens do, but they’re foundational to the global financial system—and, hopefully, to your deeper understanding of portfolio management and strategic investing.
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