Bond Markups

Though you will not typically pay a sales charge when you purchase bonds in the primary market, all bond trades in the secondary market incur sales charges.

Sales charges are computed differently for bonds than they are for stocks. When you buy a stock, you see both the price you received for the stock and the commission the broker charged separately. In the bond market, bond prices include commission, which is computed as a percentage of the bond's price.

The difference between what you pay and what the dealer pays is the markup, which can be as high as 4% or 5%, though markups on Treasuries are usually lower than 0.5%. More frequently traded bonds tend to have lower markups than less frequently traded ones. And, because bonds with lower interest rates are typically harder to sell, brokers generally charge higher markups to do so.

If you are working through a broker-dealer who does not make a market in the bond you would like to buy, you may end up paying two markups - the markup charged by your broker and the one charged by the firm from which your broker had to purchase the bond.

Bid-Ask Spread

The difference between the price at which investors are willing to buy bonds and the price at which investors are willing to sell them is called the bid-ask spread. The bid is the price a buyer wants to pay, and the ask is the price a seller offers. If a bond has a market spread of 76 bid / 79 ask, the spread is 3, or $30. The market spread is the amount that a dealer pays to buy or sell a bond. When you buy and sell, the spread may be larger.