Bond Purchases- A Step by Step Guide

Daily I get calls from prospective clients looking for more information on global or international bonds that are recommended or suggested to them. Whether the yields are high or seem low, we patiently explain the details on the bonds and how the process works. If the client is a savvy investor, we address their specific questions and focus on the execution of their purchase. Whether a client is really interested or not, it is always our pleasure to give information and guidance This article is a guide to the steps taken to execute a bond daily.

The First stage is choosing an investment broker who will provide: the kind of service you require, latest information and a competitive price. You will also take into consideration how stable and reputable this institution is and if they can give you the “hand holding” if needed, to understand your risk profile and needs etc. A question to ask yourself is will my business be appreciated or will I be just another customer number?

The Second stage is opening an account to facilitate the investment and providing the relevant information required which can differ from institution to institution. So be patient during this process. Yes, this involves a lot of documentation and questions asked which may seem intrusive, however, this information is required and helpful in understanding you, your stage in life and is mostly mandatory.

The Third stage involves selecting your bond. Whether it’s one bond or several you require, your financial adviser will normally give you a list of bonds to choose from to achieve your investing objectives. If you don’t know what you are looking for, then the adviser can guide you with their recommendations. Once you have decided on the bond or bonds you wish to purchase, the relevant agreement for purchasing the bond is handed to you for signing and will include information such as the description of the bond(s), face value amount(s) to be purchased and indicative price(s). The process then moves on to the next stage.

 The Fourth stage is executing the bond purchase at the best price. Sometimes based on the price the client wants, the trade may not go through immediately, but this is not unusual. Upon receipt of the order, your broker has two options. They can look to see if they already own the bond and choose to sell it from their own portfolio or try to source the bond by going to the market to get the best/ lowest price. The price that the broker gets may not be the same as the initial price shown to you. This is because you are simply given an indication of the likely price, and only when the broker gets a firm offer do you know the exact price for the bond. The final price is also determined by the size of the spread the broker applies. For instance, if your broker sources your bond from the market at a price of 101.00 and then sells it to you at a price of 103.00, it takes a 2-points spread or mark-up. Another broker may apply 3, 4 or even 5-points spread. Most times, the broker will not disclose the price that they are paying for the bond. Therefore, it is so important to get the best price/execution for your bond orders.

The final stage is when you are told that the trade will be settled in the time “T+2”. What does this mean? “T” represents the date on which the trade is executed by your broker, while “+2” indicates the number of additional business days required for the trade to be settled. After the trade has been settled, you can expect your bond purchase(s) to be reflected on your broker account, and a statement of your holdings and trade confirmation should be provided to you.

Your global or international bonds are held electronically at an overseas broker or custodian, but you will have easy access to your bonds in the event you need to sell them.

 If that seemed like a mouthful, don’t be intimidated by all the steps. That is why your financial adviser is there. He or she will guide you along every step of the way and ensure that your orders are executed efficiently and at the best price.

Lisa Minto is the Assistant Vice-President, Personal Financial Planning at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm

Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm