|Course 103: Buying Bonds|
|Bond Trading Transaction Costs|
No matter where you decide to buy or sell your bonds, you should be prepared to pay a transaction cost. The costs you will pay depend on the market on which you buy your bonds.
The difference between the price a broker-dealer pays for a bond and the price at which it is sold to you is known as the bond's markup. The markup is a transaction cost. With new issues, the broker-dealer's markup is included in the par value, so you do not pay separate transaction costs.
Everyone who buys a new issue pays the same price, known as the offering price. If you are interested in a new issue, you can get an offering statement describing the bond's features and risks.
Instead of charging you a commission to perform the transaction for you, the broker-dealer marks up the price of the bond to above its face value.When you buy or sell bonds through a broker-dealer on the secondary market, the bonds will have price markups. Instead of charging you a commission to perform the transaction for you, the broker-dealer marks up the price of the bond to above its face value. Markups are usually from about 1% - 5% of the bond's original value. Bond dealers generally charge higher markups on smaller bond sales than larger ones. If you are buying a Treasury bond over the counter, you may have to pay a small, additional flat fee.
If you sell a bond before it matures, you may receive more or less than the par value of the bond. Either way, your broker-dealer will mark down the price of your bond, paying you slightly less than its current value. He or she will then mark up the price slightly upon resale to another investor. This is how broker-dealers are compensated for maintaining this active secondary market.
Bonds bought on the exchanges generally have much higher markups than bonds bought over the counter. It is difficult to know how much of a markup you are paying, because the markup is built into the price of the bond.
Next: Buying Bonds Indirectly >>
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