Question

1. How does the secondary bond market differ from the primary market? If you were a firm, which would you care more about? Why?

2. Why are Treasury bonds (bills, notes and bonds) considered to be effectively risk free? What implication does this have for the price of Treasury bonds relative to most other bonds?

Answer 1

1. A primary market issues new financial securities on an exchange for companies, governments and other groups to obtain financing through debt-based or equity-based securities.

Bonds are debt-based securities. In a primary market they are issued to first time buyers by under writers or financial middlemen.

Secondary market bonds are not traded in the secondary market via exchanges, it is issued over the counter.

Primary securities may be issued in the form of initial public offerings. People need to subscribe by depositing money in a certain account opened by an under writer.

I would care more about secondary bond market. In initial stages if securities are not sold then business decisions may be taken more carefully. Secondary bond market prices are determined by market forces more and hence can affect businesses more severely.

2. Why are Treasury bonds (bills, notes and bonds) considered to be effectively risk free? What implication does this have for the price of Treasury bonds relative to most other bonds?

Treasure bonds are backed by government assurance as they are issued by government. It has minimum to none risk and hence are considered safer investments but they often offer less returns. Treasury bonds as explained above are priced higher and offer less interest rates.