New bond issues are sold in the primary market. In a new issue, all of the terms are set, including the initial price and interest rates, and the bonds are sold to investors, with the issuer receiving the proceeds. Primary market issues are affected through one of two methods:
- Competitive sale: A competitive sale of bonds operates like an auction. Broker-dealers acting as underwriters or syndicates of underwriters bid against each other by submitting to the issuer on a given day at a given time a sealed bid to buy the issuer’s bonds and then reoffer them to investors. The underwriter or syndicate of underwriters that submit the lowest interest cost for the bonds are awarded the competitive bid.
- Negotiated sale: In a negotiated sale, the terms and price of the bonds are negotiated by the issuer through an agreement with an underwriter or syndicate of underwriters selected in advance of the sale.
A secondary market transaction does not involve the issuer, but is a transaction between two investors – a buyer and a seller. Secondary market transactions involve a brokerage firm which acts either as an intermediary between the buyer and seller, or as a buyer or seller itself. Market conditions, such as prevailing interest rates, supply and demand, and credit quality, among other variables, determine the price, which may differ from the par value or original price on the bond.