What role do secondary markets play in the bond market?

Secondary markets are essential to the functioning of the bond market as they provide liquidity for existing bonds. This means that investors can buy and sell bonds after they have been issued, allowing for easier entry and exit from investments. The presence of a secondary market means that bondholders can convert their bonds into cash, which is crucial for maintaining confidence in the bond market.

Liquidity is significant because it influences how investors view the risks associated with the bonds they hold. If bonds can be sold easily in the secondary market, investors may feel more secure in their investments, knowing they can sell their bonds before maturity if needed. This trading helps to establish market prices for bonds, reflecting current economic conditions and investor sentiment.

The other options relate to aspects that do not pertain directly to the function of secondary markets. While primary markets focus on the issuance of new bonds, credit ratings are determined through assessments of an issuer's creditworthiness, and interest rates for future bonds are influenced by various economic factors but not directly set by secondary market activities.