I Want You To subscribe to our newsletter. An understanding of the bond market and bond trading is essential to proper investing. Bonds and trading bonds in the bond market are confusing to most people but they are very important to the economy and the prevailing level of interest rates. Trading bonds happens many thousands times a day and is an important part of global economic markets.

The bond market is far bigger than the stock market and central banks conduct monetary policy in the bond markets. When buyers and sellers are trading their bonds, they dictate the yields of the various types of bonds they are trading.

This in turn sets the price of credit in the economy. Joe and Suzy Q Public might not understand bond trading but the yields in the bond market yield set the interest rates on their mortgages, GICs, car loans and other types of consumer loans. Bonds trade anywhere that a buyer and seller can strike a deal. Convertible bonds, some bond futures and bond options are traded on exchanges. While investors can trade marketable bonds among themselves, trading is usually done through bond dealers, or more specifically, the bond trading desks of major investment dealers.

These dealers are at the center of a vast network of telephone and computer links that connect all the interested players. In all bond trading, the goal is to take a spread between the price the bonds are bought at and the price they are sold at.

That spread is how bond dealers make or lose money.

Bond trading became very lucrative before the credit crisis, when investment dealers used their banking capital to fund huge inventories of bonds and do mostly proprietary trading. Many banks had to be bailed out by governments and this is why banking regulators now severely restrict proprietary trading activities. Trading bonds also involves financial institutions, pension funds , mutual funds and governments from around the world. The percentage interest to be paid on a bond in the course of a year.

The interest is usually payable semi-annually, although it can also be payable monthly, quarterly, and annually. The date the bond will be redeemed or paid off. The quoted price is usually based on the bond maturity at a price of par, or The price at which the trader will pay for a bond.

The price at which the trader will sell a bond. The price difference between what the trader will buy a bond at and the price at which the trader will sell a bond.

The difference on highly liquid and tradable governmentbonds is usually only a few cents. A basis point is a hundredth of a percentage point. For instance, if a yield moves from 5. Non-federal government bonds are often quoted on the basis of a yield spread over a comparable government bond.

A corporate bond with a similar coupon and maturity date could easily be basis points higher in yield than a federal government bond. Traders often bid and offer on a spread basis. What this refers to are special features for specific bonds. There are many other such special features. Federal governments in North America have moved to a system of auctions to sell their bonds to investors. Most bond dealers are allowed to bid at the auctions and then re-distribute the bonds to investors.

Most other governments and corporations use a different system of distributing new issues, namely offering them to investors through bond dealers.

A Dirty Little Secret Revealed: Broker Commissions and Investment Fees » Greater Lansing Business Monthly

The bond dealers earn a commission for distributing the bonds to investors. The offering can be on a fixed price basis , or on the basis of a fixed yield spread to comparable federal government bonds. Most government and corporate bonds are book-based and investors are discouraged from taking physical possession of the bonds. The more money he makes, the greater his bonus. That is why traders have high transactions volumes — because the more they trade, the more money they will make.

Hedge fund traders also make many trades to maximize their profits. Insurance companies and pension funds have very long-term liabilities and need to always hold bonds. Bond trading is lower profile than stock trading but it is more important. The overall effect of all this bond market activity is the prevailing level of interest rates in an economy, which affects almost all types of credit and lending. What are some of the risks involved. Founded in by a group of portfolio managers, The Financial Pipeline is dedicated to providing financial knowledge and education to anyone and everyone with even a passing interest in Finance.

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How Brokers Are Compensated for Selling Bonds | Investopedia

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You will be receiving an email shortly to confirm your subscription. Please enter a valid email address. Please enter your first name. Please check this box if you want to subscribe. Sorry, there was a problem with registration. How are Bonds Traded? Bonds Fixed Income Management Investing 3 years ago Uncle Pipeline. Importance of Trading Bonds Trading bonds happens many thousands times a day and is an important part of global economic markets. Dealers and Investors Bond Dealers While investors can trade marketable bonds among themselves, trading is usually done through bond dealers, or more specifically, the bond trading desks of major investment dealers.

Bond Investors Trading bonds also involves financial institutions, pension funds , mutual funds and governments from around the world. Bond Market Terminology Here are some of the key concepts a bond trader must be familiar with on order to do his job: Coupon The percentage interest to be paid on a bond in the course of a year. Maturity The date the bond will be redeemed or paid off. Price The quoted price is usually based on the bond maturity at a price of par, or Bid The price at which the trader will pay for a bond.

Offer Ask The price at which the trader will sell a bond. Bid-offer spread The price difference between what the trader will buy a bond at and the price at which the trader will sell a bond. Basis points A basis point is a hundredth of a percentage point. Spread over governments Non-federal government bonds are often quoted on the basis of a yield spread over a comparable government bond.

Bond auctions Federal governments in North America have moved to a system of auctions to sell their bonds to investors. New issues Most other governments and corporations use a different system of distributing new issues, namely offering them to investors through bond dealers.

Low Profile but Very Important Bond trading is lower profile than stock trading but it is more important. Uncle Pipeline Uncle Pipeline has been a Financial Pipeline contributor since From investing in bonds to managing your personal finances, Uncle Pipeline is the kindly uncle who is always there for you with great financial advice. Always opinionated but never boring, his insightful anecdotes and simple explanations will help you to make better decisions about your money.

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