There are many people in the market making an excellent living and managing portfolios who are not involved in the stock market or stock traders. For investors, bonds can be a very attractive alternative to stocks.

The bond market also offers very diversified client potential. Institutional customers such as Banks, Insurance Companies, Credit Unions, Foundations, City and Town Governments and Individuals buy bonds. The modern day Stockbroker is somewhat limited on the clients they can pursue. Individuals and business are the primary market with them. City Governments, Credit Unions, Banks and Insurance Companies either cannot buy stock or they only buy them as part of a mutual fund but they all buy bonds.

Pricing and Trading

A bond is the debt of an issuer. An issuer could be a company, a state, a town or even the U.S Government. An issuer who wishes to raise money for a fixed period of time might issue a bond for investors to buy. Let’s say ABC company wishes to raise $6 million dollars and they plan on using the money for 5 years. ABC might go to an investment banking firm like Merrill Lynch to assist them. The company will agree to pay a fixed rate of interest to all bondholders for the full 5 year term. Let’s assume that ABC and Merrill Lynch agree on an interest rate of 6% for the bond. There will be various fees (underwriting fees) that the issuer will pay to the Broker Dealer(s) involved. What happens is that Merrill Lynch will sell the bonds to their clients or other brokerage firms. The bond will pay interest of 6% per year, normally broken down into 2 semi annual interest payments. The minimum amount of a bond that someone can buy is $1,000. Meaning, 1 bond = $1,000, 10 bonds = $10,000 and so on. So if a person owns 10 bonds at 6% for 5 years, they will receive $600 per year ($300 every 6 months) and then receive their $10,000 back at the end. The amount of bonds that someone owns is known as the “par value” amount.

Bonds are normally sold based on a “mark up” from where your firm can buy them from another broker dealer. Meaning, once a new issue of bonds has traded in the market, it becomes a secondary issue. A secondary issue is one that is available to be bought and sold in the open market. If you work for a regional firm that does not do there own new issue underwriting, they will have to buy bonds from another dealer. If a bond is being offered by another dealer priced at $99 for instance ($10,000 bond at $99 = $9900) , you can sell it to your customer at $99 1/4. The quarter point will be your firms mark up and you will receive a commission off of that. You should target larger clients when pursuing bond investment business because there isn’t a lot of money in trading them unless you are buying at least $10,000 of it.

Most bond brokers and traders who do make good incomes will sell to institutions who generally don’t buy stock and who invest a lot more money. Institutional bond trades can vary between $100,000 to several million dollars placed in a portfolio. When prospecting these clients, you must ask very specific questions as to which types of bonds they buy, how long of a maturity they normally go, what minimum rating they need and how large is their current portfolio.

Individuals (not institutions) buy bonds as well. Municipal bonds are very popular with retail customers. Municipal bonds are bonds issued by States, Cities, Towns and school districts. They are also called “Tax Free Bonds” because the interest earned on them is tax free from federal taxes. They are subject to state and local tax though. They are most attractive to investors in higher tax brackets. If you are looking to work independently through a firm, you should contact primary firms such as: Merrill Lynch, Paine Webber etc. and ask if you can offer their bonds and split the commissions. A firm that agrees will fax you their inventory on a daily basis.

Bond Trader Job

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