Typically you’ll buy a bond in the secondary market (i.e. after it has been issued) through a broker, be it a government or a corporate bond. Please note that not all brokers offer the option to trade bonds.
Let’s take a look at a specific example of a bond trade:
Let’s say that G Corp issued a bond with a 6% coupon some years ago. As you can see in the picture below, the bond pays interest semi-annually, in two $30 installments for each $1,000 bond each year.
Even though it was issued at $1,000 par, you might find now it trades at only 74% to par (with the best ask price being $739 as you can see in the picture above). This is the ‘clean’ price. In practice, you’ll need to pay the ‘dirty’ price per bond that also includes accrued interest (which you’ll get back with the next coupon payment).
Clearly, it looks like some investors are worried about G Corp’s ability to pay back its debt. The current price implies a 13.2% yield, which is very high for a USD-denominated bond.
The picture above is a screenshot of Interactive Brokers’ trading platform, showing the yield on the chart and the bid and ask prices at the top (notice the relatively wide spread between the two - this is quite common with bonds).
It is possible to buy this particular bond online. However, note that even at some online brokers, you’ll sometimes need to phone in to buy certain corporate bonds. In such cases, you need to speak with a bond broker, who is an employee of a broker that executes over-the-counter (OTC) trades.
In addition to corporate bonds, you can use your online brokerage account to buy US Government bonds or bonds issued by the governments of other countries.
If you live in the US, you can also use TreasuryDirect and participate in Treasury auctions. The system is run by the Bureau of the Fiscal Service under the US Treasury Department, a branch of the federal government. It's possible here to buy US savings bonds, Treasury Bills, Treasury Notes, Treasury Bonds and Treasury Inflation-Protected Securities (TIPS) directly.
Similar schemes exist in other countries as well. For example, in Italy, BTPs (government securities indexed to the Italian inflation rate) can be purchased directly online at issuance, through any home-banking system having an online trading feature.
If you want to diversify your investments, it’s also possible to get exposure to a basket of bonds by buying a bond ETF, or exchange-traded fund.
Bond ETFs have several pros and cons. For example, if you buy an individual bond and hold it to maturity, you’ll have an easily predictable cash flow, in the form of regular interest payments and the repayment of the principal upon maturity (unless the issuer defaults). By contrast, bond ETFs don’t have a fixed maturity, and how much you can sell your ETF for will depend on prevailing prices on the secondary market; something that’s more difficult to predict.
What else do you need to know about bonds?
Want to learn more before deciding what’s your optimal bond allocation? You might want to check out these other articles to deepen your knowledge.
- What is a bond? (our main article in the bond section)
- What is a bond yield?
- How do bonds work?
- What happens when a bond comes due?