When you buy or sell a bond, you pay transaction costs just as you do for other securities. Bond brokers generally do not charge commissions. Instead, they mark up the price of bonds to a little more than the market price for purchase and pay you a price marked down from the market price when you sell. Calculating transaction costs is mainly useful for bonds bought or sold over the counter. New issue bonds have the broker’s markup included in the bond’s par value, not listed separately. The same is true of bonds traded on exchanges, rather than over the counter. The pricing of exchange-listed bonds includes the transaction costs, so it can be hard to calculate them as a separate figure.
Ask your bond broker what percentage markup (for bond purchases) and markdown (for sales) you will be charged. Typically the markup or markdown ranges from about 1 percent to 5 percent of the bond’s original, or face, value. Brokers usually set higher percentages for small orders and set a smaller percentage on larger transactions.
Multiply the markup percentage by the face value of the bond. If you are buying a newly issued bond, you can skip this step because the broker’s markup is included in the price. Suppose you buy a bond with a face value of $5,000 and the broker marks the price up to the current value plus 2 percent of the face value. Your purchase transaction cost is 2 percent of $5,000, or $100.
Multiply the markdown percentage by the face value of the bond if you choose to sell it before the bond matures. Suppose you sell the bond for $5,000 and the markdown is 2 percent of the face value. That works out to a sales transaction cost of $100. If you wait until the bond matures, you can skip this step because the bond issuer must pay you the full face value of the bond.
Add the transaction costs for the purchase and sale of the bond together. If this is a Treasury bond you might have to pay a fee in addition to the broker’s markup and markdown percentages. If this is the case, add the fee to your other costs to calculate the total transaction costs for your bond investment.