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Subject:  Re: Buying Bonds Date:  12/21/2006  10:00 PM
Author:  imdajunkman Number:  19105 of 35909

Where Do I Buy Corporate Bonds?

• Corporate bonds can be bought via bond desks or on-line through brokerages, typically for a slightly higher commission than for Treasuries, although there are now many discount brokerages that offer the same rate on all or most bonds.
--- Vanguard's commission on corporate bonds is $25 plus $2 per $1000 bond.

• Bonds are not sold through big, central, markets, like stocks, so you need to rely on the inventory available at your broker.
---Some people who would never use a full-service broker for stocks prefer one for bonds, because of larger inventories.
---Others use multiple brokerage accounts, in order to have a larger combined inventory and to choose whoever has the best deal for the same bond.

• Beware of mark-up costs (the difference between the price listed for a bond and what you actually pay for it), which vary considerably between brokerages and might more than make up for differences between commissions.


The preceding was offered to you as an answer to your question by someone who doesn't buy his own corporate bonds and who knows very little about the corporate bond market that is of any use to bond beginners. If you want useful information, then you need to search out useful sources, which you attempted to do by asking your question, but to which no one yet has given a proper answer, which is NOT to claim that any of the following is useful or trustworthy. But it was at least written by someone who does buy his own corporate bonds (and munis, agencies, and treasuries, but not ABS's.) So the information at least has the authenticity of first-hand experience.

You can buy corporate bonds the exact same way you can buy bell peppers. To buy peppers, you can go directly to the farmer and buy from him, or you buy from a middleman whose place of business can be as informal as a roadside vegetable stand or as elaborate as a conventional grocery store. Not many issuers of corporate debt sell directly to the public. But there are some, and you can find them by doing some searching. However, most people buy their bonds through a securities broker (“a bond store”), which might be a “discounter”, a mid-priced dealer, or a “full-service” broker (who generally won't be any more expensive than the discounters). So where you buy your bonds -- what store you buy them from-- won't much matter as far as price.

However, some brokers are definitely cheaper than others, with Interactive Brokers –-and their $1/bond commissions-- probably being the cheapest. The downside of using IB is that they don't quote the whole corporate market. But, then, no one does. All of them quote only a fraction of it, with some quoting a larger fraction than others. E.g., Fidelity brags that they quote 7,000 bonds. E*Trade claims to quote 18,000. Not all of that 18,000 are corporates, but I know for a fact that that Fidelity's inventory –-the bonds they hold in house or that they can access through though their network of dealers— is smaller than E*Trade's. And Scottrade's bond inventory is even smaller than Fidelity's.

An aside: Why do inventories vary? Liquidity. Just because umpteen million dollars of the bond are known to be outstanding doesn't mean that there is anyone who is willing to sell you some of them. (The smart money sits on the good stuff and sells their trash.) Also, the price at which you will be able to buy your peppers –-your bonds-- will depend on supply and demand factors (such as the growing season) and the quantity you wish to buy, as well as the sort of relationship you cultivate with the seller. If you buy many cases of peppers through the year, year after year, you can obtain the best prices. The same is true with bonds and with any market transaction. If you're a tiny player and you don't know the market, you'll typically pay the most adverse prices, which typically have three components: a spread, a markup on top of the spread, and a commission.

A spread is simply the difference between the asking price (“the ask” or “offer”) and the selling price (“the bid”). The combination of the best ASK (the lowest asking price) and the best BID (the highest price at which a buyer would be willing to buy your bonds) creates “the inside market”. Although it is true that there is no national exchange where corporate bonds are sold the way there certainly are exchanges where stocks are sold, there is a national quoting system whereby it is generally possibly to find out what the inside market is for any corporate bond, as well as Time & Sales for those bonds (which is yet more terminology you'll need to look up.) Once you know what the inside market is for a particular bond (which includes information as to both Price and “Size”, then it is easy to determine whether your broker is “marking up”, which most brokers do. If you want a bond and they don't have it in their inventory (or can't do a “crossing trade”, which is another term you'll need to look up), then they go into the secondary market, buy the bonds at the best price they can and then re-price the bonds slightly higher (and, possibly, apply a commission as well) and then sell them to you.

Markups happen in several ways. Any new-issue bond has a built-in markup, which is the underwriter's profits (and how that happens is a fascinating story you'll need to look up). Markups also happen in the secondary market, as the previous discussion explained.

Commissions vary all over the map from $1 per bond with a $5 minimum per trade to a couple of bucks per bond with a $25-50 minimum. There are two basic viewpoints on commissions. One viewpoint argues that other factors (such as good executions, good customer service, and access to research and/or hand-holding) far outweigh the differences in total commission costs between one broker and another. Another viewpoint argues that costs are the reciprocal of gains and have to be minimized and that costs for investors won't come down unless investors vote with their feet by moving accounts to brokers who offer them the lowest total costs.

NB: Some brokers