Bonds are fixed securities that denote debt. When a person or company purchases a bond from the government, corporation or from a state or financial institution they are lending their money to that specific entity. In return they will be able to get back the amount of their investment and interest once it matures. Whether they are savings bonds or munis; bonds are traditionally a stable form of investment for any person’s portfolio.
Bonds are not typically made available to the general public. However, the average consumer is able to buy a bond if they know where to purchase these particular security notes. Many banks and credit unions sell bonds but a lot them do not. If a bank does sell bonds to their customers or consumers in general, they usually do not advertise this service. Most people must use the services a financial institution or a broker to purchase a bond. They can also be purchased online.
Investment banks often distribute bonds. This process is called underwriting at is a common way that investors get bonds for their portfolios. The best way for an investor to purchase a bond from an underwriter is by accruing them for a wholesale price. Keep in mind that investment banks have to slightly markup the price of the bond to make a profit. However, an underwriter ensures that a private investor pays a good premium for this type of security.
Brokers also sell savings bonds. They often trade them through an “over-the-counter” transaction. An over-the-counter transaction takes place on a secondary market instead of being sold on a formal exchange such as NYSE. Keep in mind, if you decide to buy savings bonds through a broker, they might claim that the transaction is commission free. Do not believe this because it is simply not a true statement.
Brokers have to markup the price of the bond to make a profit or their commission. If they did not markup the price they could not make any money from this type of transaction. Once again you might not be able to detect how much the markup is; but you can get an idea by looking at the latest quote for a particular bond to figure out the markup price. Also, the cost of selling bonds through a secondary market is a lot higher for dealers.
The average consumer can also purchase bonds through US Treasury Direct. This is an online service that has been made available from the Bureau of the Public Debt. Consumers can bypass brokers and underwriters to purchase securities from this federal organization.
Keep in mind that many bond transactions are now paperless. The internet has allowed many companies, businesses and agencies to sell their bonds electronically through the web. This saves millions of dollars on paper cost and helps to keep bond amounts within a reasonable price.
Municipal Bonds are also called “munis” and they are used to raise money for state, county and community governments. Munis are usually sold through investment brokers. These bonds can typically be purchased in increments of $5,000.
Corporate bonds are available from companies and investors can purchase them from a broker, a commercial bank or some other financial intermediary that provides this security.
Investors can purchase junk bonds which are usually issued by companies who have a high default risk and low credit rating. Junks bonds can be purchased from brokers and institutions that specialize in the sale of this type of bond.
Government bonds are also known as treasuries and they are sold as bills, notes and bonds. Bills mature in less than 1 year, debt securities mature in 1 to 10 years and bonds typically mature in more than 10 years. These types of bonds can be purchased online from treasury direct. Saving bonds are typically purchased from the government.
US Savings Bonds
United States savings bonds can be purchased directly from Treasury Direct.
The sale of bonds are regulated by the SEC or Securities and Exchange Commission. This federal organization ensures that the sale of bonds are being performed in a legal and ethical manner. The SEC can provide important information about different types of bonds and practices that are involved in the sale of bonds.