The Purchasing Process of Bonds

Price quotes: Bonds are quoted in hundreds, but negotiated in denominations of thousands. A bond price quote of $86 ? means that the bond is negotiated not at $86.75, but rather at $867.50 per bond.

The bid price is the highest price that a buyer would pay for a bond. For example, when someone sells a bond whose market price is 94 ? , the highest point that a buyer would offer would be $945.00 per bond.

The ask price is the lowest price offered for a bond buy the seller. For example, an investor that buys a bond with a bid of 94 ? and an ask price of $94 5/8  would pay for the bond $946.25 (the lowest price that a seller of this bond will accept).

The spread is the difference between the bid and the ask price of the bond, part of which is a commission to pay to the broker or dealer. A large spread indicates a bond inactively traded. Bonds are bought in similar way as stocks. Although a large part of the bonds is bought and sold through brokerage firms, one can purchase some bonds through banks or directly from issuers.

The different type of purchase orders (market and limit orders) used to buy stocks are also applicable to purchase bonds.

The main difference between buying stocks and buying bonds lays in the lack of clarity in the market price of bonds.

Current price quotes indicating the bid and the ask price for bonds during the negotiating day are not quoted on the Internet. When you want to buy stocks from a company, you call your broker or search in the web for current prices, moreover you can easily get an updated form of bid and ask prices of the stock.

Finding current bid and ask prices of a bond can be difficult because the bond market is a dealer market in which the same bonds can be offered at different prices. For example, a dealer offers a General Motors bond with a maturity date of 2028 at a price of $867.50 and other dealer asks for $900 for the same bond.

Individual investors are less probable to receive not only better prices but also the bids and ask prices of bonds in order to assure spreads.

Although some corporate bonds are listed on the New York and American Stock Exchanges, most bonds are negotiated in the over-the-markets. You can easily find in the daily newspaper the price quotes of bonds that are listed on the exchanges.