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Hello All,

I regularly read on this board and want to thank everyone for the wealth of information provided. Also, I have a question regarding the purchase of corporate bonds. Can anyone tell me through which broker they purchase corporate bonds through? Which broker has the best rates? Thank you.

Cameron
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I have a question regarding the purchase of corporate bonds. Can anyone tell me through which broker they purchase corporate bonds through? Which broker has the best rates? Thank you.
___________________________________________
If you ever figure that one out, please tell the rest of us.

Seriously, while some brokers are better than others, it depends on things like:
1. The kind and quantity of bonds they keep in inventory.
2. Whether they're trying to unload something; if so, you may get a better price deal, but know they're dumping it for a reason.
3. The kind of customer you are.

I don't know if you realize it, but when you buy and sell bonds, there's not a centralized market. You are buying or selling in a transaction with the broker as the other party.

I currently have accounts with Fidelity and Chas. Schwab. I have bought bonds through both. The selection offered in online trading will vary a lot from one day to the next.

With Schwab you have to do more on the phone. And you can't even do everything with a call to a regular broker on the regular phone number - sometimes if you want to sell, you have to get a "bond specialist" who will "check the market" and call you back. Sometimes I feel like he's a car salesman who "has to check with his sales manager" in the back room. It is not a sophisticated company, and I've had other bad experiences too. I wouldn't use them, except that's where my 401K plan is, and I can't change that. And I can't deal in hi-yield (or junk) bonds there, which I might like to in a retirement account at times. For their other fixed-income products (CDs, preferreds, etc.) you have to call to check on those for availability, too.

I do most of my business at Fidelity, and there I like it better, but with my personal accounts, I do more with stocks, and their trading is as good as any I've seen. Buying bonds is easier, too. The best price? You probably never get the best price, as an individual, anyway, unless you're into the treasury auction markets. On their other fixed-income products, the CDs, corp. notes, etc., those will vary, too.

Bill
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The usual problems with purchasing corporate bonds are 1) most are traded over the counter and prices are not published, 2) prices quoted for listed bonds are not usually available to small investors, 3) you buy and sell from a dealer who marks up prices. Hence, it is hard to know if you got a good price or not.

Nearly all of these problems can be avoided by buying ABSs (asset backed securities), also called trust preferred issues instead. These are traded on the NYSE with prices published as for stocks, and available to buy and sell at discount brokerage commissions.

Each issue is backed by a single long bond. Hence, although they are traded as stocks, they are in reality bonds. They are available in a wide range of bond ratings. Quantum On Line is the best source of information. It gives you current bond rating, call information and links to the original issue prospectus which fully explains call provisions, etc. (Most are callable at $25 but some at $10. Hence, prices easily accomodate investments of several thousand dollars.)

The major problem with ABSs is finding them. Most are traded under brand names. They used to be listed in the Wall Street Journal preferred stock list, but WSJ has discontinued this list. In the old AP list they are listed under the issuing company. Lehman has a long list of them. But interpretation gets difficult. QuantumOnLine.com can help.

Here is my most recent list of issues with prices from October--

http://boards.fool.com/Message.asp?mid=24864832

You can find more by searching the brand names in the ticker lookup feature on Quantum (and sometimes on Yahoo Finance).

ABS issues were originally discussed on this board in message 7693. Most subsequent listings are linked to that message.

http://boards.fool.com/Message.asp?mid=19241454&Posted=24958648&pt=r

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Here's the comment from the FAQs. I think the people who do a lot of corporates buying have several brokers and pick and choose depending on what is available and the costs on a specific occasion. I'm content with Vanguard's selection, and like the fact that I could get new issues for no commission, if they ever have anything with a yield I consider competitive with CDs. My preference is for someone with straight forward commissions, who doesn't play the mark-ups with lower commissions. But occasional buyers don't need to be as picky. I don't go for the lowest stock commissions, either, because I don't buy and sell very often.


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.

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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.


Cameron,

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 will make the deceptive claim that they charge no commission for selling you bonds(which is equivalent to the lie they tell about FOREX trades being "commission-free". No brkoer does trades for free. They meet their costs and make their profits from the spread and/or a markup and/or a commmission and/or "order flow" (which is yet more terminology that needs looking up), or from all four at the same time. The only thing that varies from one broker to another are the labels and the disclosures. Some are upfront about costs. Others disguise them.

Now, here's where rubber meets the road. If you want to buy a bell pepper or two for a salad or stir-fried vegetables, you don't make much of a research effort. In fact, if you're in a hurry, you'll buy your peppers wherever is most convenient, at whatever price they are asking. You might not ever go back to that store if their prices are significantly higher than you customarily pay and their quality isn't significantly better. But the transaction is no biggie. You do it, and you move on. Bonds, OTOH, typically cost about $1,000 a piece and typically require a 5-10 bond minimum purchase. If they are letting you buy fewer, it's because they want to dump inventory, which sometimes creates pricing opportunities, because “odd lots” (which is yet more terminology that needs looking up) are often attractively discounted. But let's say that you do want 5-10 bonds, so you're talking about an amount of money for which it is worthwhile to spend some time shopping around. Fidelity –-to their credit, and there are other sources-- enables people who don't have an account with them to price bonds during normal market hours. (If you poke around their website, you'll find the right page.) Your next step would be to call your normal broker and ask him (or her) to quote you the bond. If the price is cheaper and that's where you customarily do your investing/trading, then do the trade and don't look back. The big money in bonds doesn't come from shaving nickels. It comes from getting the timing mostly right. In other words, there are smart times to buy bonds, and there are dumb times to buy bonds. Knowing which is which is a lot more important than worrying about spreads, markups, and commissions or which broker you deal with. But, yes, call or visit the websites of the major, online, bond brokers (which would be Fido, Schwab, Scottrade, E*Trade, AmeriTrade, and IB), as well as a couple of the full-service brokers. Ask them about minimum account size, account fees, commissions, markups, inventories, etc., but also look at the total picture. How many corporates are you going to be buying over how many years? Will doing business with one broker rather than another really offer any significant advantages? Lastly, and most importantly, you need to answer for yourself this question: Is now really the time to be going shopping for bonds or to be putting significant, new money to work in the asset class? Most definitely, stick a toe in the water, launch an investment or two, and learn all you can. But be very cautious about putting much new money to work, because right now the bond market is “tight”. If your timing is wrong, it's going to be expensive to unwind your mistakes. And my crystal ball isn't any better than anyone else's. But I do know, from being an experienced bond shopper, that right now yields are puny and real rates of return (after expenses, taxes and inflation) are tough to find.

Charlie

PS I use E*Trade and IB for my corporates. But Fido is finally getting serious about being a player in the online bond broker market, and I'd set up an account with them if I saw the need to do so, just as I'd do whatever I had to to accomplish my investment goals.
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Charlie ,

I don't usually bother responding to you being a pretentious pain, but let me say this for once and for all.

You have had ample opportunity to make changes to FAQs but refuse to help, because they aren't yours.

You are unwilling and apparently unable to help beginners. You want o make bond invvesting much more complicated than it needs to be so you can proclaim expertise. Ex[ertise is not necessary for buying most bonds, including high investment grade corporates.

I have always made it clear that people should not engage in speculative bond buying, which is what you do, without knowing what they are doing. Simply answering a question of where to buy corporate bonds with a basic statement about issues and options, which is what an FAQ does, does not somehow get people in over their heads.

I think you have serious self-esteem problems, and I have no intention in having to put up with them.
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Cameron:

The retail investor is at a serious disadvantage when buying bonds vs. an institutional investor. Brokerages can (and do) generally rob you blind and retail investors cannot buy some of the juiciest bonds because they may not be "registered" for sale to just anyone. So what do you do if you want to buy individual bonds? I pretty much retreat to three strategies:

1) Buy treasuries at auction. You know you won't get screwed and you can buy everything from a 4 week bill to a 30 year bond, to a 10 year TIPS. Schwab lets me buy treasuries at auction for no fee.

2) Buy bonds listed on the NYSE. These generally trade as $1000 par, and you have a reasonable, but not exhaustive, choice of issuers. If you visit the NYSE's website, you can find a list of all the bonds listed on the exchange. At Schwab I can buy these for $2 a bond.

3) Buy the stuff that trades like a stock listed at quantumonline.com. You have to do your homework here, because this stuff is really a mixed bag. Some of it is really bonds, some is preferred stock, some is a cross between the two. Much of it has optionality or other bells and whistles: callable (very common), adjustable coupons, convertible to equity (mandatory or optional), perpetual, etc. If you don;t know what you are buying, you will be sorry at some point.
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Eliot,

I have said it before, and I'll say it again. Your fixed income expertise is limited to CD's and TIPS, where your insights are both trustworthy and shrewd.

But you know nothing about corporate bonds that is worth knowing. For you to pretend otherwise is dishonest, and you do a disservice to bond beginners who would be better served by reading any of the many very adequate introductory books there are and then getting some "hands-on" experience.

I declined to participate in your FAQ project because I think it is an unreemable waste of time. The high-level issues which you choose not to understand are what determine what is an appropriate answer to a low-level questions. Until you get the big stuff right, you will continue to make a mess of the little stuff.

Charlie
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Hello everyone,

Thank you for the responses and I have done some research myself. My father recently retired (sold his company) and is going to be investing in fixed income securities for a steady income stream during his retirement. I have taken a "debt" class in college, but for myself since I am young, mainly invest in equities. I am fairly versed in bond valuation etc., but have failed to apply my knowledge in the real world (as I have previoulsy had no interest in investing in bonds). I am in no way acting as a finanical advisor but am just relaying what I know regarding fixed income securities.

He is not interested in speculating in the bond market and is only interested in having a steady income while minimizing risk (and obviously maximizing return). He has looked into many different bond funds and I think, has settled on some of Vanguard's bond funds. The only problem with bond funds, as you all already know, is that there is no specific maturity, so he will not be able to forecast the exact cashflows. Another thing is that CD rates are fairly high right now and with yields over 5% and FDIC insured, it seems hard to find much better fixed income vehicles (right now). What do you all think of bond funds vs CDs vs investment grade corporate bonds at the present time? Any other comments or help would be greatly appreciated. Also please remember, I am not acting as a financial advisor and my father and I are just using these boards for what they are intended to be: a great source of shared information. Thank you.

Cameron
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Loki,

Despite your difference of views with Charlie, I think he still provides valuable knowledge to this board. He's chosen how he's going to impart that knowledge-- in posts-- and it's his prerogative to do so in that manner and to not contribute to the FAQ. He's also free to criticize the FAQ, with or without producing suggestions for how to change it.

I don't see how you calling him names, or diagnosing his issues, or guessing what he "really wants", helps matters.
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"He's chosen how he's going to impart that knowledge-- in posts-- and it's his prerogative to do so in that manner and to not contribute to the FAQ. He's also free to criticize the FAQ, with or without producing suggestions for how to change it.

I don't see how you calling him names, or diagnosing his issues, or guessing what he "really wants", helps matters. "

Pot, kettle, black
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Despite your difference of views with Charlie, I think he still provides valuable knowledge to this board. He's chosen how he's going to impart that knowledge-- in posts-- and it's his prerogative to do so in that manner and to not contribute to the FAQ. He's also free to criticize the FAQ, with or without producing suggestions for how to change it.

I don't see how you calling him names, or diagnosing his issues, or guessing what he "really wants", helps matters.


Charlie does have some knowledge to impart. Yet I'm wondering why he feels a rather consistent need to insult Loki who, IMNSHO, has been more than patient when faced w/ outright taunts.

Debate & differences of opinion have a place.

jmc
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