Corporate Bond Market Characteristics

Size of Market.  The corporate bond market is generally large and liquid; in 2009 daily trading volume was an estimated $16.8 billion and total issuance was over $900 billion. The total market value of outstanding corporate bonds in the United States at the end of 2009 was approximately $6.9 trillion. A variety of investors participate in the corporate bond market, including individuals who invest in corporate bonds through direct ownership and/or through mutual funds; insurance companies; pension funds and other institutional investors.

Trading Venues. The vast majority of corporate bond transactions, even those involving exchangelisted issues, take place in the over-the-counter (OTC) market. This market does not have a central location, but rather is made up of brokers and dealers from around the country who trade debt securities over the phone or electronically. Market participants are increasingly using electronic transaction systems to assist in the trade execution process. Some bonds trade in the centralized environments of the New York Stock Exchange (NYSE) and American Stock Exchange (AMEX), but the bond trading volume on the exchanges is relatively small.

Bonds are traded on both a principal and agency basis.  When a broker buys or sells bonds from their firms’ inventory – or on a principal basis – clients do not pay an outright commission, but instead pay a markup that is built into the price quoted for the bond. If a broker has to go out into the market to find a particular bond for a customer, a commission may be charged. Commission rates and markups vary based on the type of bond and size of the transaction.

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