Question

In: Finance

#1. Who are the dealers in the bond market? #2. Secondary markets or traders provide liquidity....

#1. Who are the dealers in the bond market?

#2. Secondary markets or traders provide liquidity. What is liquidity and why is it so important?

Solutions

Expert Solution

#1] A dealer in the bond market is an individual or firm who buys securities on his/its own account [at the bid price] and sells those securities on his/its own account [at the ask price]. He profits from the spread [difference between the bid and ask prices] in the quotes.

,Dealers do not undertake transactions for others' sake; they do it for themselves. As such they become market makers for the securities that they deal with. Brokers and traders in turn do business with dealers.

#2] Liquidity in secondary financial markets means the possibility to sell a security close to its quoted price and at desired quantities.

Secondary markets provide the opportunity for investors in primary securities to sell their holdings when they want. If primary securities cannot be sold in desired quantities and near to their quoted prices, investors will not be able to realize money from their holdings. If they are not able to do so they would not be able to realize gains/ shift their investments. It would also not be possible for other investors to acquire securities from the secondary market.

If secondary markets do not provide liquidity, investors would not have confidence in the primary market and the result will be lower activity in the primary market leading to overall recession in financial markets.


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