Question

In terms of debt instruments, distinguish between the primary and secondary market and discuss
the implications for liquidity if an instrument is not tradable on the secondary market?

Answer 1

The primary market is where the debt instruments are created and issued for the first time. This includes the adventures, bonds that are directly sold by companies, government with the help of investment banks and underwriters. The secondary market is where the debt instruments already issued in the primary market are traded. Note that in the market, the issuer does not involve in income generation while their valuations are based on the performance in the market.

Now, note that liquidity implies the easiness with which the assets or bonds here can be converted into cash. A debt instrument is sold for a given period giving the investors interest and the redemption value at the end of the maturity. Hence one needs to wait the entire period to get its money back. The entry of the secondary market helps in converting this amount into cash through trading. But if these instruments are not allowed to trade in the secondary market, then the liquidity will decline and in fact, is zero till the period of time of its maturity.