Matrix Pricing
Matrix Pricing Process Matrix pricing is a valuation method widely utilized by financial... Read More
Secondary markets are “aftermarkets” where existing securities are traded among investors. The major players in these markets are large institutional investors and central banks. Below are the two main classifications of secondary markets.
The Bid-offer spread (or bid-ask spread) is the amount by which the ask price exceeds the bid price for an asset. It is usually considered as an indicator of liquidity. A reasonable spread is generally 10-12 bps, whereas an illiquid asset may trade at a spread beyond 50 bps. When there is no bid or offer price, the bond is said to be completely illiquid.
Settlement occurs after the trade takes place. The bonds are passed to the buyer, and the seller receives payment. Secondary market settlements for government or quasi-government bonds are usually realized on a cash basis or T+1 basis (one day after the trade). In contrast, corporate bonds usually settle on a T+2 or T+3 basis (2 or 3 days after the trade).
Question
ABX Mutual funds buys a large amount of 5-year U.S. T-Notes from a competitor fund. The trade will usually settle:
- On the trade date plus 1 day.
- On the trade date plus 7 days.
- On the trade date, plus 2 or 3 days.
Solution
The correct answer is A.
Secondary market settlement for government or quasi-government bonds usually occurs on a cash or T+1 basis.
B and C are incorrect as corporate bonds usually settle on a T+2 or T+3 basis.