How to Buy Corporate Bonds without Paying Commissions

Many personal financial advisors recommend that investors maintain a diversified investment portfolio consisting of bonds, stocks and cash in varying percentages, depending upon individual circumstances and objectives. For investors searching for a higher yield than normally available in the government market and bank CDs, corporate bonds offer a better fixed-income choice. We all want to save money when buying a financial asset, but with the exception of US Treasury Bonds, purchasing individual corporate bonds will require paying a commission or fee. Unlike many stocks that can be brought directly from the issuing company thereby evading paying a broker’s commission, most corporate bond offerings are not sold directly to individuals. The following steps are strategies you can used to avoid paying a commission.

Instructions

Difficulty: Moderately Easy

Things You’ll Need:

• Corporate bond listing reference sources
• Investment bank bond account
• Internet accessible computer (Optional)

1. Buy only newly issued bonds. Most new bonds are issued through an investment bank, called an "underwriter," rather than directly to the public. The bond issuer swallows the sales commission and in effect you would be getting the bond at wholesale.
2. You can also buy bonds through a commercial bank. Some banks sell bonds at no cost to their customers usually if they maintain a certain amount of funds in an account with the bank. If your bank offers bond brokerage service check with an agent from that department because he or she is more likely to be willing to workout a deal then the bank’s general customer service representative.
3. Search for New Issue Investment Grade Bonds There are several sources for bond information available, including major personal-finance magazines and the business pages of your daily newspaper. Well-known bond rating firms, such as Fitch Ratings Ltd, Standard & Poor's, or Moody's Investors Service, provide detailed analyses by subscription also, a number of Internet sites provide current information on new issues.
4. Underwriting Investment Bank Once you have chosen a bond issue that meets your long term financial objective open an account at the investment bank that is underwriting the bond issue. Some major firms with branches across the country are: Bank of America, Citigroup, Goldman Sachs, J. P. Morgan, Lehman Brothers, Merrill Lynch, Morgan Stanley, RBC Dain Rauscher, and UBS.
5. After you have opened an account place your order. Tell the broker or agent exactly what bonds you are interested in and how many you want to buy. You may need to buy a minimum number of the bonds. Corporate bonds often require a $5,000 minimum purchase. Bonds are usually sold in $5,000 face value increments with a minimum of 15 bonds per trade or an entire block if less than 15 bonds.
6. Pay for your order. Most investors pay for bonds with funds saved for this purpose, or you can by on margin. A margin account is basically a loan account between the bond purchaser and the bank. Buying bonds on margin is one way to add a fixed income component to a portfolio, but there are risks as well as benefits. You may be allowed up to three days to complete your payment, but sometimes you are only given one day.
7. Once your order is filled, the bank will send you confirmation of your order. All new bond issues must be registered with the issuer, and are available as either Registered Bond Certificates or Book Entry. Holders of registered bond certificates receive a paper certificate with a brief description of the terms printed on both sides.
8. Bonds are redeemable in cash To relieve you from the responsibility of holding a bond certificate it is advisable to purchase bonds in book entry form. At maturity, a book entry bondholder automatically receives payment of principle along with any remaining interest, where as bond certificates must be surrendered to the trustee bank in order to receive payment of the face amount of the bonds plus any interest due.

Tips & Warnings

• If you need cash you can sell your bonds any time prior to maturity in the secondary market. Some bonds trade more actively than others and may be easier to sell. Because bond prices and interest rates move in opposite directions, you may receive more or less than what you paid if you sell. If you hold your bond until it matures the issuer will pay back the full face value.
• All information contained in this article is for educational use only. The author makes neither a recommendation as to the appropriateness of investing in fixed-income (bonds) securities nor is providing any specific investment advice for any particular investor. Due to the complexity of individual investment decisions, supplemental information and sources should be sought in order to make informed investment decisions.