What are Primary Markets in TradFi?
Primary markets are financial markets where new bonds are issued and sold for the first time. In the primary market, issuers, typically governments, corporations, or other entities seeking to raise capital, sell newly created bonds to investors. The process of issuing bonds in the primary market involves underwriting by investment banks or financial institutions.
Key features and processes in the primary markets for bonds include:
- Issuance: In the primary market, bonds are initially offered to the public. The issuer determines the terms of the bond, including the face value, interest rate, maturity date, and any special features. These terms collectively make up the bond's offering.
- Underwriting: Investment banks often play a crucial role in the primary market by underwriting the bond issue. Underwriting involves the bank purchasing the entire bond issue from the issuer and then reselling it to investors. The underwriter earns a fee for this service.
- Offering Price: The underwriter sets the initial offering price of the bonds based on various factors, including market conditions, interest rates, and the creditworthiness of the issuer. Investors can purchase the bonds at this offering price during the initial sale.
- Subscription Period: The period during which investors can subscribe to the new bond issue is known as the subscription period. Investors submit their purchase orders during this time, indicating the quantity of bonds they wish to buy.
- Allocation: After the subscription period ends, the underwriter allocates the bonds among the subscribing investors. Larger institutional investors may receive a larger allocation compared to individual retail investors.
- Listing: In some cases, after the primary issuance, the bonds may be listed on a secondary market, such as a stock exchange, allowing investors to trade them among themselves.
- Proceeds for the Issuer: The funds raised from the sale of bonds in the primary market are used by the issuer for various purposes, such as funding capital projects, refinancing existing debt, or meeting other financial obligations.
In conclusion, the primary market for bonds provides issuers with a means to raise capital and offers investors the opportunity to purchase newly issued securities. It is a critical component of the overall bond market and provides a mechanism for companies and governments to access funding from the investing public.