The secondary market is the forum in which Eurobonds that have been already issued are exchanged between investors. In order for the first market to operate efficiently, a very cost-effective and liquid secondary market is necessary. This tends to be less important in private placement markets, where a Eurobond is placed for long-term investment, with a single institution.
The Eurobond secondary market is not a floor-trading type of market. Eurobonds transactions are conducted mainly over the phone by dealers. Most of them in London, which is the principal centre for the Eurobond secondary market. This is usually called “over the counter” trading (OTC).
The process of pricing Eurobonds in the secondary market cannot be easily identified.
Traditionally dealers make numerous calls before quoting a price. However, the easiest way to price a zero-coupon Eurobonds is probably the technique adopted by Grabbe (1986):
For example, if t is the beginning of the current payment period, of an Eurobonds that matures at time t+T, and makes coupon payments at regular intervals, say every year, the price B(t,T) can be calculated as follow:
B(t,T) = Z(t,1)C(t,1) + Z(t,2)C(t,2) + … + Z(t,T)C(t,T) + Z(t,T)P(t,T)
In this example Z(t,n) denotes the period t price of a bond that pays one unit at time t+n, and doesn’t pay anything before t+n. C(t,n) denotes the actual coupon payment at time t+n. Here we are ignoring any early redemption privileges and we are assuming that the bonds repays the principal P(t,T) at time t+T.
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