How to Buy Bonds

Brokers like Schwab or Fidelity make a huge inventory of third party bonds available to their retail clients. You can search by type, industry/sector, price, amount, maturity, credit rating, and yield. The markup (commission) is pretty low. If you feel uncomfortable navigating through unfamiliar pages and tables, these guys have bond trading desks manned by knowledgeable and helpful bond traders who will be happy to walk you through the process and answer all your questions - no sales pressure. Keeping all your bonds under one roof makes managing your bond portfolio easier as markups, prices and inventories don't vary much from broker to broker.

A bond selling for more than its face value is said to trade at a premium; for less - at a discount.

While most bonds are issued/traded in $1,000 increments (1 bond = $1,000), their prices are quoted as a percentage of par. A $1,000 bond at par is quoted at 100. A price of 96 means 96% of each $1,000 in face value, or $960. If you buy 5 bonds at 96, you will pay $4,800 for $5,000 of face value, which you will receive at maturity.

Most bonds pay interest semi-annually but accrue it daily. If you buy a bond between interest payments, the accrued interest is added to the purchase price so that the seller gets the interest accrued to him through the sell date but you then get the full semi-annual payment.

Corporate bonds can be called, or redeemed, by the issuer early, after a certain date. Corporations like to have the call provision when they issue long-term bonds: if interest rates drop, they can call the bonds and refinance them at a lower rate. Buy bonds with call protection and count the yield to call, not to maturity.

Junk Bonds
The best way to buy junk bonds is through a CEF (Closed End Fund). A CEF issues a fixed number of shares that trade on an exchange like a stock and buys securities with the proceeds. There are times when the value of the CEF shares is below the value of the bonds it holds, i.e. the fund trades at a discount to its NAV (Net Asset Value). At times of panic and fear you can get discounts of 15-25% on top of 15-20% yields. That's sure worth the risk!

Although the bond market is larger than the stock market, it's much less liquid. If you need money prior to maturity, you can always sell your bond in the secondary market but expect a low bid, so generally it's not a good idea to trade bonds. Just buy and hold them to maturity.