Active Bond - Explained
What is an Active Bond?
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Table of ContentsWhat is an Active Bond?How Does an Active Bond Work?Academic Research on Active Bonds
What is an Active Bond?
An active bond refers to either a corporate bond or other fixed-income security which is often traded in largely on the New York Stock Exchange (NYSE). This isn't to be mistaken for actively managed bond investment techniques.
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How Does an Active Bond Work?
Active bond crowds trade active bonds and they are traders who engage in the buying and selling of bonds which are often traded. Active bond orders are usually filled quickly as a result of higher demand presence from investors, and generally, they have lesser bid-ask spreads. Because active bonds have higher liquidity, active bond traders dictate prices better. This is entirely different from infrequently traded bonds which inactive bond crowd trade. An inactive bond crowd refers to an exchange members' group who engage in the purchase and sale of infrequently traded bonds. Due to the lack of frequent trading, it may take a longer time to fill limit orders placed by an inactive bond crowd. Another name for the inactive bond crowd is the cabinet crowd. Before the invention of electronic trading, orders placed by members of the inactive bond crowd usually were kept in cabinets off to the side of the general trading floor. This brought about the cabinet crowd nickname. All else being equal, bigger trades are usually less costly than smaller ones; unlike large institutions, small institutions pay more to trade; and there is the likelihood of small bond dealers For some investors, active bonds can be a good choice in that, as fixed-income securities, the bonds' price is usually unaffected by their high trade volume. Furthermore, active bonds are rated higher by agencies like Moody's and Standard & Poor's. Combining these features, investors frequently use active bonds to diversify portfolio or as a safe investment during market volatility periods. A daily chart is published by many financial publications. This chart shows the ten most actively traded securities which are based on the total face value traded, in each of the three sectors of the corporate bond market: high-yield, convertibles, and investment grade. Investors can utilize this data for comparing the market value of the corporate bonds they are either thinking of buying or the bonds they own. As noted by SIFMA, higher volumes of trade for a specific security typically means better order execution, higher liquidity, and highly active market for buyer and caller connection. The most actively traded corporate bonds of the day might show where the bond investors get the biggest opportunities, as well as, risks in terms of both issuers and industries.