Factors Affecting the Marketability of Municipal Bonds
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.
Marketability Factors
| 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.