Buying selling and evaluating bond trading costs

Portfolio Construction · Bonds Explained

Identify both sides of the market

The bid is the price a buyer offers. The ask is the price a seller requests. A displayed midpoint or evaluated value is not necessarily available for your trade. The size, timestamp, settlement terms and security identifier matter.

A recent large institutional trade may not represent the price available for a small order. Use comparisons as evidence while recognising that conditions can differ.

Calculate the immediate cost of reversing

Suppose a hypothetical bond has a bid of 99.20 and an ask of 100.00 per 100 of face value. Buying $10,000 face value at the ask costs $10,000 before accrued interest and fees. Immediately selling at the unchanged bid produces $9,920.

That $80 difference is the bid and ask spread effect. It is 0.8% of the purchase amount. Additional commissions or charges would increase the cost. This example assumes the quoted sizes are available and prices do not move.

Ask how the intermediary earns money

A dealer acting as principal may include compensation in its selling or buying price. An agent may charge a commission. Ask for a complete explanation rather than assuming that no separate commission means no transaction cost.

Accrued interest is usually a transfer of earned coupon interest to the seller, not dealer compensation. Keep it separate when analysing costs, while still including it in the cash needed to settle.

Use a repeatable execution record

Record the security identifier, face amount, clean quote, accrued interest, total cost and yield convention before placing an order. Compare alternatives at a consistent time and request a firm price when possible.

After execution, reconcile the confirmation. For illiquid securities, a limit on price can control what you accept, but cannot guarantee that a trade occurs. Urgent liquidity needs and thin markets are an expensive combination.

Try it yourself

Buying $8,000 face value at 101 costs how much before accrued interest? If a $24 fee is added, what is the cost excluding accrued interest?

Show the worked answer

Clean consideration is $8,080. With the fee it is $8,104. Compare this complete cost, together with accrued interest and contractual cash flows, when assessing the investment.