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When the issuer first
offers new issues, that first trading is done in the primary market,
where the money raised from the sale of the bonds goes directly to the
issuer for its use.
Subsequently, the bonds
can be bought and sold among other investors, and this is referred to as
the secondary market. The secondary market provides liquidity to buyers
of the bonds who are now able to sell the bonds before the maturity date,
should they wish to do so. The trading of bonds in the secondary market
creates a market pricing of the bonds that depends on the supply and
demand of the bonds, and the prevailing interest rates, among other
factors.
When the market price of
the bond is less than its par value, the bond is being sold at a
discount. When the market price of the bond is more than its par value,
the bond is sold at a premium.
The secondary market
plays an important role because:
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Investors purchasing
bonds at the primary market know there is an avenue to sell off
their bonds. |
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The secondary markets provide a gauge for issuers to price their
primary issues.
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