FRM Part I · FRM Exam Part I · Corporate Bonds
Which statement best describes how corporate bond trading differs from trading in listed equities?
Corporate bond trading is mostly over the counter, with dealers quoting prices and holding inventory. The market has a very large number of distinct issues, and many trade only occasionally, so liquidity is thinner and less transparent than in listed equities.
- AMost corporate bond trading takes place on a single central exchange with a continuous public limit order book
- BMost corporate bond trading is conducted over the counter, with dealers quoting prices and many individual issues trading infrequentlyCorrect
- CCorporate bonds trade with narrower bid-ask spreads than equities because there are far fewer issues outstanding
- DCorporate bond prices are set once a day by the issuer, so dealers do not take inventory risk
Explanation
Corporate bonds are mainly traded OTC through dealers. There are many distinct issues (different maturities, coupons, covenants), and many trade rarely, which makes liquidity thinner than for equities. The exchange-based and narrower-spread statements are the opposite of market reality.
Did you get it right without looking?
One question tells you little. A timed set on Corporate Bonds shows your real accuracy, how long you take and where you lose marks.
More Corporate Bonds questions
- Two bonds from the same issuer have identical maturity and coupon. Bond A is a recent USD 2 billion issue with an active dealer market; Bond…
- A corporation issues a bond with a clause that lets the issuer redeem the bonds before maturity at a pre-specified price. Relative to an oth…
- A one-year zero-coupon corporate bond yields 6.50% (annual compounding) while the risk-free one-year rate is 4.00%. Assuming a recovery rate…
- A portfolio manager observes that a senior unsecured bond has a one-year default probability of 3% and a loss given default of 55%. The same…
- A corporate bond dealer quotes a bid of 98.40 and an ask of 98.90 (per 100 of par) for a thinly traded bond. What is the quoted bid-ask spre…
- Holding other factors constant, which change would most likely cause the credit spread on a company's existing bond to widen?