Bond Trading, Bond Trade

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The active purchase and sale of bonds with the sole aim of generating profits from short-term variations in bond prices is called bond trade. Unlike stock trading, there is no centralized exchange for bond trading. Bonds are traded in a decentralized,“over-the-counter” (OTC) market. However, certain bonds, like corporate bonds, and bond derivatives, such as bond futures andbond options, are readily traded in the US stock exchanges.

Bond Trading: Basics

Bond trading is conducted on the OTC market, also called the secondary market, with the help of bond dealers. Bonds are generally sold in denominations of $5,000 and traded in increments of $100, with $100 being their face value. Thus, if a bond is quoted at 96, it means that the bond is trading at $96 and is available at a discount of $4 with respect to its face value.

Most of the times, bond trading does not involve commissions. The dealer receives the spread, which is the difference between the “ask” and the “offer” price of a bond at any given moment. This spread acts as commission for transferring the bond from one investor to another.

Bond transactions are usually carried out through discount or full service broker accounts. An investor can also opt for the services of a personalized bond broker for systematic bond trading. However, this option can prove to be expensive.

An investor can also buy government bonds from government agencies. In the US, government bonds can be bought through Treasury Direct’s official website. This website was set up by The Bureau of the Public Debt to ease out the process of government bond trading.

Although bond trading does not offer as many profit-making opportunities as offered by stock trading, several investors opt forthe former because:

  • In case of bankruptcy, the risk of losing the complete sum of money is far lower than that for a shareholder. In such a case,a corporate repays its bondholders at least the principal amount before considering its shareholders.

  • The interest rates for bonds are set at the market rate when the bonds are issued. Even if market interest rates fall afterwards, the interest rates on bonds remain unchanged.

  • Although bond prices vary due to several market factors, the volatility is not as severe as that of equities.

  • Certain bonds offer tax exemption.

Before venturing into bond trading, investors must consider the ratings of the issuer. Bond ratings are provided by reputed rating agencies like Standard and Poor’s (S&P) and Moody’s.

 

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