Skip to content

CFA Level I Exam · Fixed-Income Issuance and Trading

Secondary Bond Markets and Trading Venues Explained

Updated 7 October 2026 · Fact-checked

The secondary bond market is where investors trade existing bonds after issuance. Most trading is over-the-counter, with dealers quoting bid and ask prices from their own inventory, increasingly on electronic platforms. Liquidity varies by issuer and issue. Government bonds are the most liquid. Settlement is usually T+1 to T+2 for bonds, depending on the market.

Understand Secondary Bond Markets and Trading Venues

Once a bond is issued in the primary market, the issuer is out of the picture. From then on, investors trade the bond among themselves in the secondary market. The issuer receives no money from these trades. What the market gives you is a way to buy or sell before maturity.

Most bonds trade over the counter (OTC), not on an exchange. In an OTC market, dealers (usually large banks) quote a bid (the price they pay) and an ask or offer (the price they sell at). The difference is the bid-ask spread, which is the dealer's compensation and your transaction cost. Dealers take bonds onto their own books, so they provide liquidity by acting as principals. Bonds are far more numerous than shares: one issuer may have dozens of bond issues with different coupons and maturities, so many bonds rarely trade. That is why a dealer-based model fits.

Electronic trading has grown. Platforms include dealer-to-client systems (you see quotes from several dealers, often through a request for quote), all-to-all systems (any participant can trade with any other, so buy-side firms can also provide liquidity) and exchange-style order books. Some bonds, mainly smaller or retail-sized issues in certain markets, do trade on exchanges. Government bonds and bonds with large issue sizes trade most electronically.

Liquidity means you can trade quickly, in size, at a price close to fair value. Signs of good liquidity are a narrow bid-ask spread, large issue size, recent issuance (on-the-run) and a high-quality issuer. Older, off-the-run bonds, small issues and lower-rated bonds have wider spreads. Liquidity can disappear in stressed markets, so spreads widen when you most need to sell.

Trades must be settled: cash is paid and the bond is delivered. Settlement timing differs by market and instrument. Many government bonds settle on the trade date (T) or T+1, while many corporate bonds settle T+1 or T+2, depending on the market. Cash settlement means the same day. Check what the question states. Bonds are quoted at a clean price (without accrued interest). The buyer pays the full price (clean price plus accrued interest) on the settlement date, so accrued interest runs to settlement, not to the trade date.

Key formulas to remember

Bid-ask spread
Spread = Ask price − Bid price
The dealer buys at the bid and sells at the ask. You, the client, sell at the bid and buy at the ask.
Full (invoice) price
Full price = Clean price + Accrued interest
The buyer pays the full price at settlement. Quotes are clean prices.
Accrued interest
AI = Coupon per period × (days since last coupon ÷ days in coupon period)
Counted from the last coupon date up to the settlement date. The day-count convention (for example 30/360 or actual/actual) depends on the bond.
Spread as percent of price
Relative spread = (Ask − Bid) ÷ Mid price, where Mid = (Bid + Ask) ÷ 2
Use this to compare liquidity across bonds with different prices.

How to solve Secondary Bond Markets and Trading Venues questions

Most questions on this topic are conceptual or involve a simple clean/full price or spread calculation. Use this order.

  1. 1Identify what is asked: venue (OTC, exchange, electronic), liquidity, settlement or a price calculation.
  2. 2For venue questions, recall that most bonds trade OTC through dealers who act as principals and quote bid and ask.
  3. 3For liquidity questions, look for the drivers: issue size, issuer quality, on-the-run status, time since issuance and spread width. Narrow spread means more liquid.
  4. 4For settlement questions, find the trade date and the settlement convention stated, then count forward from the trade date.
  5. 5For price questions, work with clean price and accrued interest. Accrue to the settlement date, then add to get the full price.
  6. 6Remember which side you are on: as a client you sell at the bid and buy at the ask.
  7. 7Eliminate the two wrong options by checking direction (for example, wider spread means less liquid) and units.
  8. 8Check that your answer is reasonable before you pick.

Quickest way: Dealer and liquidity shortcut

When to use it: Use for conceptual questions on venues, liquidity and who provides it.

  1. Default answer for bonds: OTC, dealer-based, principal trading.
  2. Liquid means narrow spread, large issue, on-the-run, high credit quality, government issuer.
  3. Illiquid means wide spread, small or old issue, lower rating, stressed markets.
  4. Client buys at ask, sells at bid. The dealer is the opposite.
  5. Price paid at settlement is clean price plus accrued interest.

Common mistakes in Secondary Bond Markets and Trading Venues

  • Saying most bonds trade on exchanges like shares.

    Equity markets are more familiar, so students assume bonds work the same way.

    Fix: Remember that most bond trading is OTC through dealers because of the huge number of distinct issues. Exchange trading exists but is the smaller share.

  • Reversing bid and ask from the client's perspective.

    Bid and ask are quoted from the dealer's side.

    Fix: The dealer bids (buys from you) and offers (sells to you). You sell at the bid and buy at the ask. The ask is the higher price.

  • Paying only the clean price at settlement.

    Screens show clean prices, so students forget accrued interest.

    Fix: The buyer pays clean price plus accrued interest, which compensates the seller for coupon earned since the last payment.

  • Accruing interest to the trade date instead of the settlement date.

    Trade date feels like the moment ownership changes.

    Fix: Count days from the last coupon date to the settlement date. Settlement is when cash and bond change hands.

  • Assuming a narrow spread always applies, even in stress.

    Liquidity is treated as a fixed trait of a bond.

    Fix: Liquidity varies over time. Spreads widen in crises, and dealers may cut inventory and step back.

  • Thinking electronic trading means exchange trading.

    Both involve screens.

    Fix: Many electronic platforms are still OTC. Dealers or participants quote and trade bilaterally on the platform, without a central exchange order book.

Worked examples

Example 1

A dealer quotes a corporate bond at 98.40 bid and 98.90 ask. Your client wants to sell 5,000 bonds, each with par value USD 1,000. What does the client receive in total, ignoring accrued interest and fees, if the quotes are per 100 of par?

Show the solution
  1. The client is selling, so the dealer buys at the bid: 98.40 per 100 of par.
  2. Total par = 5,000 × 1,000 = 5,000,000.
  3. Proceeds = 5,000,000 × 98.40 ÷ 100 = 4,920,000.
  4. Check: at the ask, the client would have paid 4,945,000, so the spread cost is 25,000 across the position.

Answer: USD 4,920,000 (excluding accrued interest).

Example 2

A bond with a 6% annual coupon paid semiannually (30/360 day count) last paid a coupon on 15 March. A trade on 10 June settles on 11 June. The clean price is 101.50 per 100 of par. What is the full price?

Show the solution
  1. Semiannual coupon = 6 ÷ 2 = 3.00 per 100 of par.
  2. Days accrued from 15 March to 11 June on 30/360: March 15 to June 15 is 90 days; less 4 days (June 11 to 15) gives 86 days.
  3. Accrued interest = 3.00 × 86 ÷ 180 = 1.4333.
  4. Full price = 101.50 + 1.4333 = 102.9333.

Answer: About 102.93 per 100 of par.

Exam tips

  • Expect three-option conceptual items: pick the choice that says OTC, dealer-based, and principal trading for most bonds.
  • For liquidity questions, rank by issue size, issuer quality, recency and spread. Government and on-the-run bonds are most liquid.
  • In settlement questions, use the convention stated in the question. Do not assume T+1 if the question gives another one.
  • Numerical options go from smallest to largest. If your full price is below the clean price, you have a sign error.
  • Never choose an option that says exchanges handle most bond trading or that spreads are fixed.

Practice questions from Fixed-Income Issuance and Trading

Secondary Bond Markets and Trading Venues in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Secondary Bond Markets and Trading Venues: frequently asked questions

Do bonds trade OTC or on an exchange?

Most bonds trade over the counter, where dealers quote bid and ask prices and trade from their own inventory. Some bonds trade on exchanges, but this is the smaller share. Electronic platforms are mostly OTC systems with dealers or other participants quoting.

What does T+1 settlement mean for bonds?

T+1 means the trade settles one business day after the trade date, when cash and bonds change hands. Settlement conventions vary by market and instrument, so use the one given in the question. Accrued interest runs to the settlement date.

How do I judge bond market liquidity?

Look at the bid-ask spread, issue size, issuer credit quality and how recently the bond was issued. Narrow spreads, large issues and on-the-run government bonds signal good liquidity. Liquidity can fall quickly in stressed markets.

What is the difference between dealer-to-client and all-to-all platforms?

On a dealer-to-client platform, clients request or see quotes from dealers. On an all-to-all platform, any participant can trade with any other, so investors can also provide liquidity. Both are electronic, and neither is a traditional exchange order book by default.