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Bond Trading Transaction Costs

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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.

Things To Know

  • The markup is a transaction cost for buying a bond.
  • If you sell a bond before it matures, your broker-dealer will mark its price down. This is how the broker-dealer gets paid.

Markups and offering prices

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.

The size of a markup

When you buy or sell bonds through a broker-dealer on the secondary market, the bonds will have price markups or markdowns. Instead of charging you a commission to perform the transaction for you, the broker-dealer marks up or down the price of the bond to above or below its face value. Markups and markdowns are usually a small percentage of the bond’s face value.

Transaction costs during selling

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.