Whenever I buy bonds through my discount broker, the commissions they charge me are hidden. When I want to buy a particular bond, they just quote me a price, and when I decide to sell the bond, they just quote me another price. There is never any mention of commissions.
Of course, discount brokers don’t let you trade bonds out of the goodness of their hearts; they make money somewhere. With stocks it is more obvious. You pay commissions and lose some money on the spread between bid and ask prices.
Right now I only have one bond. It is a British Columbia coupon for $14,000 coming due 2010 June 18. A “coupon” is a bond that is bought for a discount to the face value and pays no interest until the coupon comes due. So, I paid less than $14,000 for it, and will get $14,000 in June of 2010.
To figure out the fees I’m charged for trading this bond I first checked what I could get for it if I sold it: $13,438.14. The cost of buying another identical bond is $13,532.82. So, the total fees charged for buying and selling this bond are $94.68. I’ve actually done this calculation twice about a week apart to see how stable these costs are. The total fees the first time were $96.01. Based on just two data points, the total cost of a buy and sell is about 0.7% for this bond.
Let’s compare this to the costs of trading $14,000 worth of XIU, an index ETF of the S&P/TSX 60. I would pay $9.95 for each trade, and based on 1000 shares and a bid-ask spread of $0.02, the total spread cost of a buy and a sell is about $20. So, the total fees are $39.90. Based on this example, trading the bond is nearly 2.5 times more expensive than trading the index ETF.
If any readers would care to check on their costs of trading bonds with their brokers, I’d like to try to get a picture of bond trading costs.