Individuals may purchase bonds from a number of sources, such as full-service brokerage firms, banks or firms that specialize in debt instruments, and discount brokers. U.S. Treasuries may also be bought directly from the Federal Reserve Bank.
However, bonds trade quite differently from stocks. First, the availability of bonds varies from dealer to dealer. If you want to buy a specific type of bond (say, an intermediate muni with a rating of A or better), several dealers may have to be approached before you find one who has what you want.
Discount brokers generally do not maintain inventories. If you want to buy a certain type of bond, their traders have to buy it from another dealer; if you want to sell the bond, their traders ask for bids from other dealers.
The best sources for individual bonds tend to be larger broker-dealer firms or firms that specialize in selling bonds to individual investors. These firms typically maintain inventories of bonds. They may also be able to obtain desirable new issues, whereas smaller firms may not.
Pricing also varies from dealer to dealer. Dealers mark up their bonds independently. The markup depends on their own cost, the size of the order, and how much profit they want to earn. Commissions costs, moreover, are hidden, so that the buyer does not know either the cost to the dealer or the size of the markup. Basically, buying a bond is analogous to buying a stock without knowing either the size of the commission or the price on which the commission is based. When you shop for that A-rated intermediate muni, you are likely to be offered a variety of bonds with different yields and prices by different dealers.
Pricing information has been difficult to obtain and that continues to be true. The large bond dealers consider pricing information to be proprietary, and they have resisted efforts to make pricing information more widely available. The financial press publishes some pricing information, but it is limited. The tables that appear in the financial newspapers list a few representative widely traded issues. Most of the prices apply to institutional-size trades on $1 million or more. If you want to either buy or sell smaller-size lots (that is, fewer bonds), the price per bond will be higher if you buy, lower if you sell.
Two additional factors further muddy bond pricing. With the exception of Treasuries, many bonds trade infrequently. If a bond has not traded for months, there is obviously no current valid pricing on it. Furthermore, the bond market includes millions of issues of all types, sizes, maturity dates, and credit quality. The same bond may be sold by different dealers for widely different prices, based on the price at which they bought the bond, the size of their markup, the size of the lot, and the direction of interest rates—and these are only a few of the relevant factors.
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