Investor Costs Associated with Buying and Selling Bonds

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Q: I invest in individual bonds. The broker states that they get paid with the difference between bid and asked when buying and selling bonds for my account. Is that true? Can you send link to info that explains this? — Frederick Wishner

A: The Financial Industry Regulatory Authority (FINRA), the Securities and Exchange Commission (SEC) and the Securities Industry and Financial Markets Association (SIFMA) all have information on their respective websites on investing in bonds.

FINRA, for instance, published an Investor Alert, What You’re Paying For When You Buy a Bond, that might be useful. In that alert, FINRA breaks down what’s included in the price of a bond and how to compare costs before committing to a purchase. Here’s an excerpt from that alert that, with hope, answers your question:

When a dealer is acting as principal in a bond trade, they may include a markup to the bond they are buying for or selling from their inventory as part of the overall price a customer pays. It isn’t a separate line item like the fixed commission someone might pay on a stock trade where most brokers act only as an agent.

The best tool investors have for figuring out whether they are getting a fair price from their dealer is to look up recent, similarly-sized trades for their bonds on FINRA’s Trade Reporting and Compliance Engine, or TRACE. The system currently provides historical information on the date and time trades occurred, and the size, price, and yield of each individual trade.

And in the future, investors may be able to access even more specific information about the markup their dealers charge. In November, 2014, FINRA requested comments on a proposed rule that would require a firm to disclose how much they paid for a particular bond in a retail-sized transaction, meaning a transaction in 100 bonds or less or a transaction with a face value of less than $100,000, if they are selling the same quantity to a customer on the same day.

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