Question

Explain the difference between a primary market for a security and a secondary market for that security AND what advantages does a Secondary market bring?

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How does an increase in interest rates affect a security's duration?

Answer 1

A primary market means the market where a security which is just created by the company is sold where as in a secondary market, the security is traded continuously between the buyers and the sellers. A secondary market is better for price discovery because more people take part in it and it is accessible to everyone. Also, more information is available in a secondary market as the security is not being bought for the first time.

An increase in interest rates, causes the cash flows at the end or at the later time intervals to become smaller in value. Their value decreases more than the cash flows near the origination and hence, their weight goes down. As a result, they contribute less in duration calculations and hence the duration decreases.