CFA Level I Exam · Fixed-Income Markets for Corporate Issuers

Primary and Secondary Bond Markets for Corporate Issuers

Updated 7 October 2026 · Fact-checked

The primary market is where a corporate issuer sells new bonds to investors for the first time, through an underwritten offering, a best-efforts offering, shelf registration or a private placement. The secondary market is where investors trade existing bonds, mostly over the counter through dealers, so liquidity depends on dealer inventory.

Understand Issuance and Trading: Primary and Secondary Markets

A primary market is where new securities are sold and the issuer receives the cash. A secondary market is where existing securities change hands between investors. The issuer gets no new money from secondary trades.

There are four main ways to issue corporate bonds. In an underwritten offering, an investment bank (the underwriter) buys the whole issue from the issuer at an agreed price and resells it to investors. The underwriter carries the risk that it cannot sell the bonds at that price. The gap between the price paid to the issuer and the price at which bonds are sold to investors is the underwriting spread, which is the bank's compensation.

In a best-efforts offering, the investment bank acts only as an agent. It tries to sell the bonds but does not guarantee the amount raised. The issuer carries the risk of unsold bonds. This suits smaller or riskier issues.

A shelf registration lets an issuer register a bond programme with the regulator once, then sell portions later as market conditions suit, with little extra paperwork. This gives flexibility and speed. In the US it is the SEC that handles registration. A private placement sells bonds directly to a small group of qualified investors without a public registration. It is cheaper and faster, but the bonds are usually less liquid and may have restrictions on resale. A public offering is a general term for an offering to the public that requires registration.

In the secondary market, most corporate bonds trade over the counter (OTC), meaning through a network of dealers rather than on an exchange. Dealers quote bid and ask prices and hold inventory. Many corporate bonds are thinly traded because each issue is small, has its own maturity and coupon, and is often held to maturity. Liquidity is usually better for large, recently issued, highly rated bonds, and worse for older, smaller or lower-rated issues. Liquidity is also worse in stressed markets. Wider bid-ask spreads signal lower liquidity.

Key formulas to remember

Underwritten offering risk: Underwriter bears unsold-bond risk; issuer receives the agreed price; Also called a firm commitment. Underwriter's gain = resale price − price paid to issuer.
Best-efforts offering risk: Bank acts as agent; issuer bears unsold-bond risk; No guarantee of proceeds to the issuer.
Shelf registration: Register once, issue in tranches over time; Gives timing flexibility and lower repeat issuance costs.
Private placement: Sold to qualified investors, no public registration; Lower cost and speed, but weaker liquidity and resale limits.
Bid-ask spread: Spread = ask price − bid price; Wider spread means lower liquidity and higher trading cost.
Underwriting proceeds to issuer: Net proceeds = issue size × price paid by underwriter ÷ 100 (price per 100 par); Use the underwriter's purchase price, not the public offer price.

How to solve Issuance and Trading: Primary and Secondary Markets questions

Use this method for any question on how bonds are issued or traded.

1Decide if the question is about the primary market (new issue, issuer gets cash) or the secondary market (existing bonds, investors trade).
2If it is about issuance, find the key clue: guaranteed purchase, agent only, registered once and sold later, or sold to a few institutions.
3Match the clue to the method: guaranteed purchase = underwritten; agent only = best-efforts; register once, sell in pieces = shelf; few qualified buyers = private placement.
4Ask who bears the risk of unsold bonds: underwriter in underwritten, issuer in best-efforts.
5For trading questions, identify the venue (mostly OTC dealers) and judge liquidity from size, age, rating and spread.
6If a calculation is needed, use the price the issuer actually receives and the bid-ask spread as the cost.
7Eliminate options that contradict the clue, then choose from those that remain.

Quickest way: Clue-to-method matching

When to use it: Use when you have about 90 seconds and the question asks which issuance method or market feature applies.

Underline the clue word: guarantee, agent, register once, private, OTC.
Guarantee or buys whole issue = underwritten.
Agent or tries to sell = best-efforts.
Register once and sell later = shelf.
No public registration, few investors = private placement.
Thin trading or wide spread = low liquidity in an OTC market.

Common mistakes in Issuance and Trading: Primary and Secondary Markets

Saying the issuer bears unsold-bond risk in an underwritten offering.
Students mix up underwritten and best-efforts offerings.
Fix: Remember that underwriters buy the bonds, so they carry the risk. In best-efforts the bank is only an agent.
Thinking shelf registration is a separate type of bond.
The name sounds like a product.
Fix: It is a registration method that lets the issuer sell in tranches over time. The bonds themselves are ordinary bonds.
Assuming corporate bonds trade mainly on exchanges.
Equity trading is exchange-based, so students carry that over.
Fix: Most corporate bonds trade OTC through dealers, and many trade infrequently.
Believing the issuer receives cash when investors trade in the secondary market.
Confusing who gets paid in a trade.
Fix: Secondary trades move cash between investors. Only primary sales raise money for the issuer.
Treating private placements as highly liquid because they are cheaper.
Low cost is linked to low friction.
Fix: Private placements usually have resale restrictions and fewer buyers, so liquidity is lower.
Using the public offer price to compute issuer proceeds in an underwritten deal.
Both prices appear in the question.
Fix: The issuer gets the price the underwriter pays. The difference to the public price is the underwriter's spread.

Worked examples

Example 1

A company issues €200 million of bonds through an underwritten offering. The underwriter pays 99.20 per 100 of par and resells to investors at 99.70. How much does the issuer receive? A) €198.4 million, B) €199.4 million, C) €200.0 million.

Show the solution

The issuer receives the price the underwriter pays: 99.20% of par.
Proceeds = €200 million × 0.9920 = €198.4 million.
Option B is €200 million × 0.9970 = €199.4 million, the public sale value, not the issuer's proceeds. Option C is par.

Answer: A) €198.4 million.

Example 2

A mid-sized firm wants to raise funds but is concerned that demand may be weak. An investment bank agrees to try to sell the bonds but will not guarantee any amount. Which statement is most accurate? A) The bank bears the risk of unsold bonds, B) The issuer bears the risk of unsold bonds, C) The offering is a shelf registration.

Show the solution

The bank will not guarantee any amount, so it is acting only as an agent.
An agent arrangement is a best-efforts offering, not underwritten.
In a best-efforts offering, unsold bonds stay with the issuer, so the issuer carries that risk.
Option A describes an underwritten offering. Option C is about registration timing, which the question does not mention.

Answer: B) The issuer bears the risk of unsold bonds.

Exam tips

Match the clue word to the method first. Most questions give one clear signal such as guarantee, agent, register once or private.
Remember that risk allocation is the usual test: underwritten shifts risk to the bank, best-efforts keeps it with the issuer.
For liquidity questions, wider bid-ask spreads and thin OTC trading point to lower liquidity. Large, new, highly rated issues are more liquid.
For calculations, use the price the underwriter pays for issuer proceeds. Check the units (millions) before choosing an option.
With no penalty for wrong answers, always answer. Eliminating one of the three options raises your chance of a correct guess from about 33% to 50%.

Practice questions from Fixed-Income Markets for Corporate Issuers

Issuance and Trading: Primary and Secondary Markets in other exams

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

Issuance and Trading: Primary and Secondary Markets: frequently asked questions

What is the difference between shelf registration and an underwritten offering?

Shelf registration describes how the issue is registered: once, with bonds sold later in tranches. Underwritten describes who buys the bonds: an investment bank commits to buy them and bears the resale risk. The two can be combined, since a shelf issue can be sold through an underwriter.

What is the main difference between the primary and secondary bond market?

In the primary market, the issuer sells new bonds and receives the cash. In the secondary market, investors trade existing bonds with each other, and the issuer gets no proceeds.

How do corporate bonds trade OTC and why is liquidity limited?

Dealers quote bid and ask prices and trade from their own inventory, rather than through a central exchange. Each bond has its own coupon and maturity, and many are held to maturity, so trading is thin. Smaller, older or lower-rated bonds usually have wider spreads.

Why would an issuer choose a private placement?

It is usually faster and cheaper because there is no full public registration. The trade-off is that the bonds are less liquid and may have resale restrictions, so investors may demand a higher yield.