There exist two credit markets in which bonds are bought and sold. They are the primary bond market and the secondary bond market. In the primary bond market, the purchaser of a bond effectively lends money to the bond issuer, i.e., the borrower. Both the purchaser and the issuer benefit from this transaction. The purchaser receives (possibly nil) regular payments over the agreed period, together with a (possibly nil) lump sum payment at the end of the period. And the issuer receives an immediate source of funds to put to good use. In the secondary bond market, the purchaser buys the rights to an existing bond, which include both the abovementioned payment terms together with any risk of default.

There is therefore conceptually little difference between the primary and the secondary markets, except that it is in the primary market that the bonds are brought into existence by virtue of the issuer requiring an immediate source of funds.

In this article, a quantitative analysis of bond trading is given. Two generic time continuous bond pricing equations are formally derived, one for the primary bond market, and one for the secondary bond market. Five types of bonds are identified via specific application of these equations. The well-known qualitative reciprocity between a coupon bond's price and prevailing bond interest rates is placed on a firm quantitative footing. Finally, the evolution of a bond investor's relative return is studied, and the impact of interest rate fluctuations on the investor's return is revealed.

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