4 Key Questions to Protect Your Coupon Income

If you, or anyone on your behalf, buys individual bonds in your account, know the markup game.  A markup is when a broker-dealer buys a bond at a low price and resells it at a higher price.  This difference, called the spread, could mean significant reductions in your income, especially since brokerage firms are legally allowed to charge undisclosed markups ranging upward of 5%.  Consider that a 2% markup will eat up a year’s worth of income.  Since the SEC doesn’t require that a broker disclose the markup, you need information.

  1. Ask your bond broker about how much sales credit he/she will receive on a prospective purchase.
  2. Ask if the bond is being recommended on its own merits or if the brokerage house owns it?
  3. Ask the broker if there are any incentive tied to the recommendation.
  4. Find out the bond’s CUSIP number, and lookup the price range where the bond should be trading.  Go to: http://emma.msrb.org/

 

Since all bonds traded in the muni market will have a markup at either the wholesale or retail level, determining the impact of these markups on your income should benefit your pocket book.  Of more importance though, is that you understand the type of bond, credit quality, coupon rate and maturity when making your decision.

 

Sources

Broker Markups: A Bond Investor’s Worst Enemy: http://www.forbes.com/2009/02/26/munis-spreads-markups-personal-finance_investing_ideas_bond_brokers.html

How Expensive Are Your Bonds: http://www.cbsnews.com/8301-505123_162-57475603/how-expensive-are-your-bonds/

How Bonds are Bought and Sold: http://www.municipalbonds.com/education/read/150/how-bonds-are-sold-your-transaction-costs

Broker Markups Taking a Big Bite Out of Muni Bond Payouts: http://www.investmentnews.com/article/20100825/FREE/100829963