Bond Markets

Most individuals purchase bonds via a broker or through bond funds. By the end of this section, you will be able to describe the process for purchasing a bond and explain why bond markets may not have price transparency.

Purchase Process

Most individuals purchase bonds via a broker or through bond funds.


LEARNING OBJECTIVE

  • Describe the process for purchasing a bond

KEY POINTS

    • Buying a bond involves setting up an account with a broker and requesting that the broker buy bonds on the buyer's behalf.
    • An individual can also purchase bonds by investing in bond funds, which hold baskets of bonds rather than competing for individual bond sales.
    • Most bond funds pay out dividends more frequently than individual bonds.

TERMS

  • Pension funds

    Any plan, fund, or scheme which provides retirement income.

  • hedge funds

    An investment fund that can undertake a wider range of investment and trading activities than other funds, but which is generally only open to certain types of investors specified by regulators.

  • bond funds

    A bond fund or debt fund is a fund that invests in bonds or other debt securities. Bond funds can be contrasted with stock funds and money funds.

Bonds are bought and traded mostly by institutions like central banks, sovereign wealth funds, pension funds, insurance companies, hedge funds, and banks. Insurance companies and pension funds have liabilities which essentially include fixed amounts payable on predetermined dates. They buy the bonds to match their liabilities, and may be compelled by law to do this. Most individuals who want to own bonds purchase bonds via a broker or do so through bond funds. Still, in the U.S., nearly 10% of all bonds outstanding are held directly by households.

Buying a bond involves setting up an account with a broker and requesting that the broker buy bonds on the buyer's behalf. Brokers also can furnish considerable market information regarding prices, products, and market conditions. Like with stocks, accounts can be set up with an online discount broker to buy bonds while paying lower transaction fees. It is a good idea to look at several different brokers and their commission rates and services before choosing one. Additionally, bonds can be purchased directly from the U.S. federal government without the use of a broker and without paying broker commission fees.


Bond Brokers: Bonds can be purchased through brokerages, such Fidelity Investments.

An individual can also purchase bonds by investing in bond funds, which hold baskets of bonds rather than competing for individual bond sales. Bond funds typically pay periodic dividends that include interest payments on the fund's underlying securities plus periodic realized capital appreciation. Bond funds typically pay higher dividends than certificates of deposits (CDs) and money market accounts. Most bond funds pay out dividends more frequently than individual bonds. Fund managers provide dedicated management and save the individual investor from researching issuer creditworthiness, maturity, price, face value, coupon rate, yield, and countless other factors that affect bond investing. Bond funds invest in many individual bonds, so that even a relatively small investment is diversified.

Source: Boundless
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