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CFA® Level I · Fixed Income · free lesson
Fixed-Income Issuance and Trading
The global bond market is larger than the equity market, yet most bonds never trade on an exchange. This module maps the market by issuer, credit quality, maturity, currency and region, explains how bond indexes are built and why they are hard to replicate, and shows how bonds are sold to investors in the primary market and traded between them in dealer-based secondary markets.
What you will learn
1. Describe how fixed-income markets are classified and identify the main issuers and investors in each market segment.
- Issuer segments: government and government-related, financial and non-financial corporate, securitized.
- Investment grade = BBB-/Baa3 or higher; below that is high yield.
- Money market (one year or less) versus capital market (longer).
- Developed versus emerging markets; domestic versus international; green, social and sustainability bonds by use of proceeds.
- Main investors: central banks, institutional investors, banks and retail investors (mostly through funds).
2. Describe how fixed-income indexes are constructed and used, and explain why they are harder to replicate than equity indexes.
- Indexes are rules-based: eligibility by issuer, currency, rating, size and remaining maturity, with regular rebalancing.
- Bond index weight = market value of the bond (price x amount outstanding) / total index market value.
- Bond indexes contain far more securities and have higher turnover than equity indexes.
- Illiquidity makes full replication costly, so passive funds use stratified sampling.
- Market-value weighting gives the largest weights to the most indebted issuers.
3. Describe how bonds are sold in the primary market, including underwritten and best-efforts offerings, bookbuilding, auctions, shelf registration and private placements.
- Underwritten (firm commitment) offering: underwriters buy the whole issue and bear the placement risk.
- Best-efforts offering: banks act as agents; the issuer bears the risk of unsold bonds.
- Bookbuilding gauges demand at different spreads and lets pricing tighten when demand is strong.
- Shelf registration: one master filing, many tranches issued over time.
- Private placements: sold to a few qualified investors; less disclosure, less liquidity, often more covenants.
4. Describe how bonds trade in secondary markets and compare fixed-income primary and secondary markets with equity markets.
- Secondary markets provide liquidity; the issuer receives no cash from secondary trades.
- Most bonds trade OTC through dealers acting as principals, quoting bid and offer prices.
- Bid-offer spreads are narrow for new government bonds and wide for small, old or low-rated issues.
- Bond markets have more securities, more frequent issuance and less exchange trading than equity markets.
- Bond liquidity depends on dealer balance sheets and can vanish in stressed markets.
Module at a glance
- Segment bonds by issuer, credit quality, maturity, currency, region and use of proceeds.
- Investment grade ends at BBB-/Baa3; below that is high yield.
- Bond indexes are market-value weighted, large, high-turnover and hard to replicate; passive funds use stratified sampling.
- Underwriters bear placement risk in a firm commitment; the issuer bears it in a best-efforts deal.
- Shelf registration lets frequent issuers sell tranches quickly under one master prospectus.
- Most bonds trade OTC through dealers; the bid-offer spread is the cost of liquidity.
- Bond liquidity is concentrated in new issues and depends on dealer balance sheets.
This free module has 4 lessons, 12 practice questions with full explanations.