Quick Answer
Marketability measures how easily a bond can be resold at a fair price. Higher rating, shorter maturity, non-callable features, higher coupon, standard block size, and a well-known issuer all improve marketability; the exam tests these factors both individually and in combination.
Now that you know how to analyze general obligation (GO) and revenue bonds for credit quality, let's look at what determines how easily a bond can be sold in the secondary market. Marketability is about liquidity: whether you can sell the bond quickly at a fair price.
What Is Marketability?
Marketability refers to the ease of selling a bond in the secondary market at a fair price. A highly marketable bond can be sold quickly without a significant price concession. A bond with poor marketability may sit unsold or require a deep discount to attract a buyer.
What Factors Determine Marketability?
| Factor | Impact on Marketability |
|---|---|
| Rating | Higher-rated bonds are easier to sell |
| Maturity | Shorter maturities are more marketable (less interest rate risk) |
| Call features | Callable bonds are less marketable (reinvestment risk for investors); non-callable bonds are more desirable |
| Coupon rate | Higher-coupon bonds are more marketable; low-coupon bonds trade at deeper discounts |
| Block size | Standard trading blocks ($100,000+) are more marketable than odd lots |
| Liquidity | Frequently traded issues from well-known issuers are more marketable |
| Dollar/yield price | Bonds priced near par are generally more marketable than deep discount or high premium bonds |
| Issuer name | National issuers (New York, California, Texas) are more marketable than obscure local issuers |
| Credit enhancement | Insured or letter of credit (LOC)-backed bonds are more marketable |
| Credit and liquidity support | Ongoing support commitments (such as standby purchase agreements) improve secondary market pricing |
| Denominations | Standard $5,000 minimum denomination bonds are more marketable |
Key principle: All else equal, investors prefer bonds with higher liquidity and lower reinvestment risk.
Think of it this way: Marketability boils down to how easy it is to find a buyer. Anything that makes a bond safer, more familiar, or more standard-sized makes it easier to sell. Anything unusual, risky, or small makes buyers hesitant.
Exam Tip: Gotchas
- Callable bonds are LESS marketable to investors because of reinvestment risk. The issuer benefits from the call, not the bondholder.
- Odd lots (below $100,000) are harder to sell than standard blocks. Institutional buyers prefer round lots.
- Issuer name matters independently of rating. A well-known issuer (New York, California) is more marketable than an obscure local issuer, even at the same credit rating.
What Should You Check on Exam Day?
- Pair each factor with its effect: higher rating, shorter maturity, non-callable, higher coupon, standard block size, and par pricing all improve marketability.
- Remember callable bonds are less marketable because of reinvestment risk to the investor, not because of any issuer downside.
- Do not assume rating alone determines marketability; a nationally known issuer name adds marketability independent of rating.