The AI (ChatGPT) Bond Investing Handbook: How Bond Secondary Market Works

Here is the response from ChatGPT for the prompt how bond secondary market works entered on February 17, 2023.

The bond secondary market is where investors buy and sell previously issued bonds. Here's how the bond secondary market works:

1. Issuance: When a company or government wants to raise capital, they may issue bonds. The bonds are sold to investors at the primary market, where the issuer sets the initial price and the initial yield.

2. Trading: Once the bonds are issued, they can be traded on the secondary market. The secondary market is an electronic marketplace where investors can buy and sell bonds with other investors.

3. Pricing: The price of a bond in the secondary market is determined by supply and demand. If there are more buyers than sellers, the price of the bond will go up. If there are more sellers than buyers, the price of the bond will go down.

4. Yield: The yield of a bond in the secondary market is also determined by supply and demand. If there are more buyers than sellers, the yield of the bond will go down. If there are more sellers than buyers, the yield of the bond will go up.

5. Settlement: When a bond is traded in the secondary market, the buyer pays the seller the market price, plus any accrued interest. Settlement typically occurs two business days after the trade date.

6. Brokerage fees: When investors trade bonds in the secondary market, they typically do so through a broker. Brokers charge a fee, known as a commission, for their services.

Overall, the bond secondary market provides liquidity to investors who want to buy or sell previously issued bonds. It allows investors to adjust their portfolio holdings and manage risk, while also providing a mechanism for issuers to raise additional capital by issuing new bonds.

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