Which of the following statements regarding bond markets is not true? Multiple Choice A small number of corporate bonds are listed on centralized exchanges. The majority of trading volume occurs in a centralized market. Most trades occur between bond dealers and large institutions. The majority of bond volume at the NYSE is in corporate debt.
The Correct Answer and Explanation is:
Correct Answer: The majority of trading volume occurs in a centralized market.
Explanation:
The statement that “The majority of trading volume occurs in a centralized market” is not true when it comes to bond markets. Unlike stocks, which are typically traded on centralized exchanges such as the New York Stock Exchange (NYSE) or NASDAQ, bond trading is predominantly conducted in over-the-counter (OTC) markets. This means that trades are negotiated directly between parties, often involving large institutions and bond dealers rather than being routed through a central exchange.
A small number of corporate bonds are indeed listed on centralized exchanges like the NYSE. However, even those that are listed often see limited trading activity through the exchange. Instead, institutions like investment banks, mutual funds, and pension funds prefer to deal directly with one another or through bond dealers, which allows for better negotiation over large quantities and customized contracts.
Most trades in the bond market occur between dealers and institutional investors. These parties handle the vast majority of transactions by volume and value. This structure allows for flexibility in pricing and negotiation, which is important given the vast number of different bonds available, each with unique maturities, credit risks, and interest rates.
Additionally, the NYSE does have a corporate bond market, and it handles a significant amount of volume. However, this is still only a portion of the entire bond market. Government bonds, municipal bonds, and other debt instruments are mostly traded elsewhere, particularly in the OTC market.
In summary, the decentralized nature of bond trading, the dominance of OTC transactions, and the preference for direct negotiation between institutions make the claim about centralized trading volume incorrect. This makes that statement the best choice for what is not true about bond markets.
