HOW TO BUY BONDS

You can purchase U.S. Treasury bonds on the secondary market or directly from the Federal Reserve. When you purchase bonds directly from the Federal Reserve, you must buy new issues, but there are no broker commissions. The Treasury holds regularly scheduled government auctions four times a year: the first weeks of February, May, August, and November. You can enter competitive bids for Treasury securities.

You can also buy new-issue corporate bonds through bond dealers. Corporate bonds are IOUs issued by private and public corporations both in and outside the U.S. They are issued by public utilities, as well as private sector firms such as transportation companies, financial services companies, and industrial corporations. The corporate bond market is quite large, with a lot of active trading.

When bonds are first issued, their prices, or face values, are fixed. Once issued, these prices can fluctuate in the secondary market due to changing interest rates. When bonds are first issued, bond dealers assist the issuer (a company or governmental body) in selling the bonds to the public, and for this they are paid a commission from the proceeds of the sale.

Older bonds are sold through brokers on the secondary market. The secondary market consists of the over-the-counter (OTC) market, including the NASDAQ, and stock exchanges such as the New York Stock Exchange (NYSE). Most bonds are sold over the counter. The OTC market consists of hundreds of banks and brokerages that buy and sell over the phone or via computer networks. Brokerage firms that deal in bonds have latitude to set prices for bonds they sell. However, all prices are negotiable. Bonds sold on the OTC market are usually sold in amounts greater than $5,000 at a time.

Financial publications such as The Wall Street Journal publish prices of bonds traded on the exchanges each day. However, very few bonds are actually traded on a daily basis.

Now that you know where you can buy bonds, let's see what is involved in pricing them.