Final answer:
Treasury bond dealers provide liquidity for U.S. Treasury bonds, facilitating buying and selling in the market. They operate on narrow spreads between bid and ask prices and play a role in both the primary and secondary markets for these bonds. Corporate bonds generally offer higher interest rates due to greater risk compared to government bonds.
Step-by-step explanation:
Treasury bond dealers play a crucial role in the financial markets, facilitating transactions and providing liquidity for Treasury bonds, which are debt securities issued by the U.S. government. These bonds are considered very safe investments, as they are backed by the full faith and credit of the U.S. government, resulting in relatively low interest rates compared to corporate bonds.
Regarding the options provided:
- Dealers typically quote an ask price for investors looking to purchase bonds and a bid price for those wanting to sell.
- They profit from the spread, which is the difference between the bid and ask prices, but this spread in the Treasury securities market is usually quite narrow due to the high liquidity and low risk associated with these government bonds.
- Moreover, dealers may trade Treasury bonds among themselves, which helps to ensure market liquidity and efficient pricing.
- They also make a primary market for Treasury bonds by underwriting new issuances and selling them to investors.
Corporate bonds, on the other hand, pay a higher interest rate than Treasury bonds due to the higher risk of default. This default risk is reflected in the bond ratings provided by agencies such as Moody's. High-yield or junk bonds offer even higher interest rates to compensate for an even greater risk of default.