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

An investor holds a corporate bond that trades in the secondary market through dealers in an over-the-counter (OTC) market. Compared with a bond listed on an exchange with continuous order-driven trading, the investor most likely faces:

The investor most likely faces wider bid-ask spreads when the bond is thinly traded. In dealer-based OTC markets, illiquid issues carry more inventory risk and less competition, so dealers quote wider spreads. Quotes are fragmented and transparency is generally lower than on exchanges.

  1. Alower search costs because quotes are centralized
  2. Bgreater transparency of last-trade prices
  3. Cwider bid-ask spreads when the bond is thinly tradedCorrect

Explanation

Most corporate bonds trade OTC through dealers, and thinly traded issues have less competition and higher dealer risk, giving wider bid-ask spreads. OTC quotes are fragmented, so search costs are not lower, and transparency is generally less than on exchanges.

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