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Fixed Income Update: Unveiling the Hidden Cost of Retail Bond Buying & Selling January 2016

What’s the Catch?

Owning individual bonds has its risks and rewards. However, buying a bond entails an unseen transaction cost, which may not always be clear to retail investors. This transaction cost exists because bonds are not typically sold with a commission. Instead, a markup is built into the bond price.

This report offers a transparent look at these hidden transaction costs for U.S. municipal and corporate bonds. To determine these costs, we used the investment-grade bonds tracked by the S&P National AMT-Free Municipal Bond Index, the S&P AMT-Free Municipal Series, high-yield bonds tracked by the S&P Municipal Bond High Yield Index, investment-grade corporate bonds tracked by the S&P U.S. Issued Investment Grade Corporate Bond Index, and high-yield corporate bonds tracked by the S&P U.S. Issued High Yield Corporate Bond Index, in conjunction with bond transaction data provided by the Municipal Securities Rulemaking Board (MSRB) and the Financial Industry Regulatory Authority (FINRA). Based on this data, we have determined the average implied transaction cost of municipal bonds since May 2011 and that of corporate bonds since July 2011. This information can help investors compare the cost of buying individual bonds to the cost of investing in bond alternatives, such as mutual funds and exchange-traded funds (ETFs).

Through October 2015, the average implied transaction cost of buying an individual municipal bond of investment-grade quality was 1.21% for retail investors. The average implied transaction cost for high yield municipal bonds was 2.10%. Investment-grade corporate bond transaction costs were lower, at 0.85%, and high-yield corporate bonds had an implied transaction cost of 1.62%.

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The content provided in these articles is intended solely for general information purposes, and is provided with the understanding that the authors and publishers are not herein engaged in rendering regulatory or other professional advice or services.  Consequently, any use of this information should be done only in consultation with qualified legal counsel.  The information in these articles was posted with reasonable care and attention.  However, it is possible that some information in these articles is incomplete, incorrect, or inapplicable to particular circumstances or conditions. We do not accept liability for direct or indirect losses resulting from using, relying or acting upon information in these articles.

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