Trading Bonds in the Secondary Market

Trading bonds allows you to lend money to corporations and receive a return on your investment. Here are the basics of bonds and how they are traded in the secondary market. 

The Secondary Market

The primary market for bonds is the market in which they are initially purchased from the company that created them. Getting involved in this primary market can be very difficult; it is typically reserved for high-net-worth investors who have dealings with investment banks. However, once those bonds are initially purchased, they can be traded to other investors. This occurs in what is known as the secondary bond market. You are buying a bond from another investor. 

How Bonds Are Traded on the Secondary Market

There are a few different methods for trading bonds on the secondary market. One of the most common methods is to open an account with a bond broker. Bond brokers deal exclusively in bonds and have the ability to connect those with bonds to those who want them. A bond broker employs traders that can value a bond and give potential buyers quotes quickly. Bond brokers typically have a lot of connections and can help you locate or sell a bond quickly. 

While bond brokers have their advantages, there are a few drawbacks to using them as well. For one thing, they typically require you to open an account with them for at least $5000. Therefore, you will have to have at least this amount of money before you can buy any bonds. Something else you have to watch out for with bond brokers is the spread that they charge you. The spread is the difference between what they buy the bond for and what they sell it to you for. You may have no idea how much they are charging you for the spread. Therefore, your transaction costs could be much higher than they should be. 

Another way that you could trade bonds is on an exchange. The New York Stock Exchange actually has some corporate bonds on their own exchange. This enables you to get online and buy or sell the bonds through their exchange at any time the market is open. 

You could also open an account with a standard investment brokerage and have access to some bonds. They may have some corporate bonds in their inventory of assets that are available for immediate purchase. The bigger the firm, the more likely they are to deal with bonds. 

Valuing Bonds

Bonds must be valued before they can be traded. A bond comes with a "par value" (the face value of the bond) and a "coupon rate" (the interest rate) that it pays. If the coupon rate is less than what the available interest in the market is, people will buy the bond for less than the par value. If the interest is higher than what the market is, people will pay a premium of the par value. 

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