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Most bond transactions can be completed through a full-service or discount brokerage, and increasingly online brokerage services allow for easy and inexpensive bond trading.
Bond Brokers
You can also open an account with a specialized bond broker, but be warned that most bond brokers require a minimum initial deposit of $5,000. Another option for adding bonds to a portfolio is by looking at mutual funds that specializes in bonds (known as a bond fund).
Mutual Funds and ETFs
In addition to numerous mutual funds, there are also exchange traded funds (ETFs) that invest in bonds, and which trade like shares of stock for investors. When buying and selling bonds on the open market, keep in mind that these are “secondary market” transactions, meaning that you are buying from another investor and not directly from the issuer. One drawback of mutual funds and ETFs is that investors do not know the maturity of all the bonds in the fund portfolio since they are changing quite often, and therefore these investment vehicles are not appropriate for an investor who wishes to hold a bond until maturity. Another drawback is that you will have to pay additional fees to the portfolio managers.
If you do decide to purchase a bond through your broker, he or she may tell you that the trade is commission free, but be wary! What typically happens is that the broker will mark up the price slightly; this markup is really the same as a commission. To make sure that you are not being charged too much, simply look up the latest quote for the bond and determine whether the markup is acceptable.
Government Bonds
Many financial institutions today will provide their clients with the service of transacting government securities. However, if your bank or broker doesn't provide this service, you can purchase government bonds directly through a government agency. (This is true in most countries). In the U.S. you can buy bonds directly from the federal government through its service, TreasuryDirect. The Bureau of the Public Debt started TreasuryDirect so that individuals could buy bonds directly from the Treasury, thereby bypassing a broker and greatly reducing transaction costs. All transactions and interest payments are done electronically.
Bond Basics: Conclusion
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