As soon as a corporate bond has been issued, trading in the secondary market where existing bonds are bought and sold can begin.

Unlike stocks which are typically traded on exchanges, corporate bonds are mostly traded over the counter, or OTC.

In the OTC market, transactions are negotiated directly between buyers and sellers, often with the help of brokers or market makers, rather than through a centralized exchange.

In secondary market trading, the key focus for corporate bond investors is typically the credit spread rather than the yield.

This is because corporate bond investors seek compensation for taking on the credit risk of the issuer rather than exposure to general interest rate movements.

If investors were primarily concerned with interest rate risk, they could achieve that by buying government bonds, which are considered credit risk free, and offer direct exposure to interest rates.

As a result, the deciding factor in corporate bond trading is the current spread level, not the actual yield of the bond.

For this reason, investment grade corporate bonds are often quoted in spread terms rather than in price or yield terms.

When an investor contacts a market maker for a quote on a specific corporate bond, they typically receive a bid and ask quote for the spread rather than a direct price or yield.

The spread is quoted over a benchmark, which varies depending on the region.

In the US, corporate bonds are generally quoted over treasury yields.

In Europe, however, corporate bonds are more commonly quoted over swap rates.

Finally, it's worth noting that the way spreads are quoted can differ depending on the credit quality of the bond.

Investment grade corporate bonds are typically quoted in spread terms as described.

While high yield bonds are often quoted in outright price terms.

Here's why this difference exists For investment grade bonds, the spread over a benchmark, either government bonds in the US or swap rates in Europe is the main focus.

This is because investment grade bonds have lower credit risk, so investors primarily consider the extra yield they receive for taking on that risk.

Quoting in spread terms allows investors to directly compare the credit risk of different investment grade bonds over a consistent benchmark.

Let's say there's an investment grade bond issued by a large stable corporation in the US.

This bond has a spread of 100 basis points or 1% over the 10 year US treasury.

The 100 basis points spread reflects the additional credit risk investors take on by holding this corporate bond compared to a credit risk-free treasury bond.

Because investment grade bonds are typically stable, investors pay close attention to spread changes relative to the benchmark rather than the bonds outright price.

A small movement in spread, for example, from 100 to 105 basis points could signal a shift in the issuer's perceived risk, even if the bond price hasn't moved much.

On the other hand, high yield bonds, which are considered riskier, are often quoted in price terms. For high yield bonds, outright price movements are more relevant because these bonds have a higher likelihood of default.

A change in price directly reflects shifts in perceived credit risk, and in investors in high yield bonds are more sensitive to these price changes than to spread movements.

Consider a high yield bond issued by a smaller company with a weaker credit profile.

This bond is trading at $85 on a par value of $100, signaling a discount, and potentially higher risk.

If the issue is financial condition worsens, the price might drop to $80 or lower.

A change that quickly signals increased risk to investors.

In this case, the price change provides a more immediate and clear indication of credit concerns compared to a spread measure.