Primary Bond Market
For corporations and municipalities, issuing a bond is a lot like an initial public offering (IPO). Typically, an investment firm is hired to underwrite the sale. The firm purchases bonds from the issuer and then works with other investment firms, collectively known as the syndicate, to offer the bonds for sale to the public.
Bonds typically require a high minimum investment, which sometimes precludes individual investors from making purchases. While par value is generally $1,000, many bonds are sold in lots of five or more. Agency securities generally require even higher initial investments of at least $10,000. For this reason, institutional investors, such as banks and mutual funds, tend to purchase more corporate and agency bonds than individual investors, though some municipalities try to make it easier for individuals to get involved.
U.S. Treasuries are sold in regularly scheduled auctions through competitive or noncompetitive bids. Because the date and time of each auction is announced ahead of time, you can submit your bid up until specified times on the auction day. The majority of individual investors place noncompetitive bids, agreeing to accept the price and yield of the bond determined at the auction. Competitive bidders ask for a specific price and yield, but may or may not be successful in purchasing the bonds.
T-bills are auctioned weekly, two- and five-year notes are auctioned monthly, and all others are auctioned at various times throughout the year. Treasuries most recently auctioned to the public are referred to as on-the-run, and older issues are deemed off-the-run. On-the-run Treasuries tend to be the most popular, and therefore the most expensive.
You can buy Treasuries through an intermediary, like a broker or certain banks, or you can buy them without going through an intermediary by establishing a Treasury Direct account with the Bureau of Public Debt online. One added benefit of Treasury Direct is that you do not pay a commission because you're buying the bonds directly from the issuer. STRIPS, however, are the one kind of Treasury bond you cannot purchase this way because they are the creation of broker dealers.
Floating a Bond
If a company or government wants to gauge the demand for a particular investment, it can float a bond. The bond is made available for a fixed amount of time at a specified rate of interest. If enough bonds are sold, the issue is said to float.