"How do I know if I am getting the best price for my Bonds when I buy or sell?"

The Fixed Income market is unique because the securities do not trade on an Exchange (i.e. NYSE or NASDAQ); therefore, bonds are traded between Dealers. This is referred to as the "Inter-Dealer Market" or the "Wholesale" market. During the wholesale process, the bonds are marked up again and again before they are offered to the public. Sometimes the bonds are offered directly to the public by the last dealer to purchase them, and sometimes to the end customer by way of a Financial Advisor.

Bond Purchase Process Example:

• Dealer 1 purchases a bond at a competitive price and places it in his inventory at $95 and sells it to Dealer 2 for $96.
• Dealer 2 marks the bond up and sells them to Dealer 3 for $97.
• Dealer 3 marks the bond up to $97.50 and offers it to his retail sales force.
• The Sales Force marks the bond up to $98 and sells it to the Financial Advisor for your bond portfolio.
• Finally, the bond ends up in your portfolio, after the Financial Advisor possibly charges you a fee, and the bond becomes a part of your portfolio at a price of $100.

Here is how the process equates to purchasing a $1 Million bond portfolio:

• You purchase a $1,000,000 bond from the Financial Advisor. The bond was originally purchased by Dealer 1 at $950,000. If you could bypass the middlemen and buy the bond from Dealer 1 after only the Dealer 1 mark-up, the same portfolio would only cost you $960,000, saving you $40,000.

Remember, this is a hypothetical example that is intended only to demonstrate the chain of events that may play out the wholesale process. These dealers and salespersons are not crooks or bad people. It's just the mechanics of the wholesale process. Often, they guess wrong and are subjected to the reverse of our mathematical example and are subject to large losses on their inventory.

If you think that cutting out most of the "middle men" would be beneficial to you, please feel free to email James R. Nici at jnici@coxnici.com for more information.