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Portfolio Management
July 16, 2018

Do You Know How Much You’re Paying for Bonds?

What’s the market price? A bond’s market price reflects the actual price it costs your broker/dealer to buy it from another dealer and, in some cases, includes non-disclosed fees paid to the dealer.
Is there a transaction fee? Although many brokers do not charge a transaction fee, some do, so it’s always good to ask. Just because there is no transaction fee doesn’t mean there aren’t similar costs embedded in the total cost being paid for a trade.
What’s the markup? A markup (or markdown) is the difference between the prevailing market price for a bond and the price a customer pays or receives. A markup represents the total compensation earned by a dealer for negotiating and executing a trade on behalf of an investor, which means it may also include any transaction fees.
How is the markup disclosed? Although required by rule in certain instances, markups and markdowns are not always documented on client confirmations, so you may need to ask to get the full picture.
Are there other additional fees? Sometimes other fees may be applicable, such as a broker-assisted fee for trades not done online.
What’s the accrued interest? Many bonds pay interest every six months, and interest accrues between one interest payment and the next. So a bond buyer also pays the seller the interest accrued between the last payment and the settlement date of the trade (but receives the full coupon payment when paid).
So what’s my overall cost for the trade? Your total cost could include market price, markup, transactions fees and any additional fees, plus accrued interest.

 

What You Can Do Next

At Schwab, we believe that transaction fees and a readily available pricing schedule are a more transparent approach to pricing than simply saying “on a net yield basis,” which can be a way of embedding costs directly in the price you pay.

  • For the majority of online transactions done through Schwab’s BondSource® platform, the only fee is $1 per bond—which is disclosed as either a transaction fee or a markup/markdown.
  • For example, excluding any accrued interest, an investor purchasing 10 municipal bonds at a cost of $1,000 per bond would typically pay $10,010 if the bonds were purchased online through Schwab. (If a Schwab broker facilitated the trade, the investor would typically pay $10,035.)
     

Learn more about Schwab’s straightforward fixed income pricing, or talk to a Fixed Income Specialist at 877-566-7982 today.

At Charles Schwab, we encourage everyone to take ownership of their financial life by asking questions and demanding transparency.

Our Insights & Ideas bring you information that fosters that ownership, because we believe that the best outcomes in life come from being fully engaged.

Want to know more? Talk with your Schwab Financial Consultant or call 800-355-2162.

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Important Disclosures

Schwab charges an additional $25 fee for trades entered by a Schwab representative.

$1/per bond pricing does not apply to specialty fixed income products such as commercial paper, foreign bonds, mortgage and asset-backed securities, and Unit Investment Trusts. Please call Schwab for more information on the costs associated with these products.

Schwab reserves the right to act as principal on any fixed income transaction, public offering or securities transaction. When Schwab acts as principal, the markup is included in the bond price and may include a profit to Schwab in the form of a bid-ask spread (which is separate from the transaction fee) that is not subject to a minimum or maximum, and a separate transaction fee.  When trading as principal, Schwab may also be holding the security in its own account prior to selling it to you and, therefore, may make (or lose) money depending on whether the price of the security has risen or fallen while Schwab has held it. When Schwab acts as agent, a commission will be charged on the transaction.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors. 

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