Both the primary and secondary bond markets provide investors with a way to invest in bonds. However, these two markets are very different and provide investors with different opportunities. Here are a few things to consider when it comes to the primary and secondary bond markets.
Primary Bond Market
When bonds are originally issued to the public, this is known as the primary bond market. When a company decides that it needs to raise money for a large project, it will potentially decide to issue bonds. The companies that issue the bonds will typically work through an investment bank to help them. The investment bank will be in charge of finding buyers for the bonds and actually issuing them. In return for their services, the investment bank will receive a specific commission for each bond that is sold.
Secondary Bond Market
The other way that bonds are sold is in the secondary market. The majority of transactions in the bond market take place in the secondary market. The secondary market represents when an individual that owns a bond sells it to another investor. Many times, institutional investors will purchase bonds through the primary market and then turn around and sell them to investors in the secondary market. In order to purchase bonds in the secondary market, an individual will need to open an account with a bond broker. A bond broker will facilitate the process of purchasing the bonds that are needed. They will help the investor research the different bonds that are available in the market and then make the purchase.
One of the biggest differences between the two different bond markets is in the amount that is paid for the bonds. In the primary market, investors are only going to pay the face value of the bond. For example, if the bond has a par value of $1000, the investor is going to pay $1000 for it in most cases.
In the secondary market, this is not the case. Bonds rarely sell for exactly the par value in the secondary market. The value of bonds is drastically impacted by interest rates in the market. If interest rates are higher than what the coupon rate of the bond is, the value of the bond is going to decrease. If interest rates are lower than the par value, the bond is going to increase in value.
In order to invest in both of these markets, investors have to have a certain amount of skill. In the secondary market, you have to be able to properly value the bonds that you are buying and selling. This requires a certain amount of skill and practice to calculate how much the bond should be sold for.
In order to get involved in the primary market, you do not need to necessarily understand how to calculate bond values, but you do need to know the right people. Most of the time, bond sales in the primary market occur between investment banks and institutional investors.