Understanding how to buy bonds is critical for investors seeking stable income, diversification, or a way to balance risk and reward in their portfolios. This comprehensive guide explains the steps, mechanisms, costs, and evaluation criteria you need to know to purchase individual bonds or bond funds in the U.S. market context, using core terms like coupon, duration, yield to maturity (YTM), Credit rating, and settlement conventions.
Direct Answer
You can buy bonds either in the primary market (at new issuance) or in the secondary market from existing holders, typically through brokerages or banks.
U.S. Treasury securities, including Treasury Bonds, can be purchased directly from the government via TreasuryDirect (official) with no brokerage fees on new issues.
For corporate, municipal, or other bonds, purchases are made through brokers; you pay a price (quoted as a percent of face value) plus accrued interest and possibly a dealer markup or commission (“sample/illustrative” costs, check your broker’s fee schedule).
Before buying, check bond features such as credit rating, coupon type, maturity, call/put options, and liquidity (via trade reporting systems such as FINRA TRACE overview (official) for corporates).
Tax treatment varies: U.S. Treasury interest is exempt from state/local tax; corporate bond interest is fully taxable. Confirm specifics with the IRS homepage (official) or a tax adviser.
The settlement period for most U.S. bonds is typically T+1 (one business day after trade), but always check current conventions.
Individual investors looking for predictable income streams through periodic coupon payments or those wishing to diversify away from equities and cash.
Retirees or risk-averse savers aiming for capital preservation and steady yield to maturity (YTM) with lower default risk options like Treasuries or high-grade corporates.
Intermediate to advanced investors seeking to optimize portfolio duration, hedge against interest-rate movements, or exploit credit spreads and callable features.
Those comfortable evaluating bond risk metrics, including credit ratings, liquidity, and convexity, and willing to monitor tax implications and reporting requirements.
Key Facts (At-a-Glance)
Item
Details
What You Buy
A loan to an issuer (government, agency, corporate, municipal) for a set period; you get periodic interest (coupon) and principal at maturity.
Where to Buy
Treasurys directly via TreasuryDirect; all types through brokerages, banks, or investment platforms using U.S. market conventions.
Minimums
U.S. Treasurys: often $100; corporates and munis: typically $1,000 or higher (“illustrative” – check broker/platform).
Pricing
Quoted as percent of face/par value; may trade above (premium) or below (discount) par; clean price excludes accrued interest; dirty price includes it.
Order Types
Market or limit orders on secondary; noncompetitive or competitive bids at government auctions.
Settlement
U.S. Treasurys: usually T+1; corporates/municipals: T+1 (check for updates).
Interest on Treasurys: exempt from state/local tax; corporates: fully taxable; munis: often state/local tax-exempt (verify specifics).
How to Buy: Step-by-Step
Choose your bond type: Decide among U.S. Treasury bonds (including TIPS/I Bonds), agency bonds, municipal, or corporate bonds based on credit rating, maturity, current yield, or other factors.
Set up an account: For Treasurys, open an account at TreasuryDirect. For all bonds, a brokerage or bank account is required; confirm that your platform provides access to the bond market segment you seek.
Understand bond features: Before placing an order, review coupon rate, yield to maturity (YTM), maturity date, callable/putable status, sinking fund provisions, and issuer credit spread to Treasury benchmarks.
Check market data: Review the bond’s price (clean/dirty), accrued interest, TRACE activity for liquidity cues, and secondary market spreads. For new issues, review offering documents on SEC EDGAR or issuer sites.
Place your order: For Treasurys, submit a noncompetitive bid (you accept the auction result) or a competitive bid (you specify yield, accept risk of nonallocation). For other bonds, use market or limit orders on your trading platform.
Settle and record: Confirm the settlement date (usually T+1); ensure funds are available (including accrued interest if you are buying between coupon dates). Keep documentation for tax reporting—interest, OID, and potential capital gains.
Costs, Taxes & Disclosures
Dealers may charge embedded markups/markdowns in bond prices or visible commissions. Brokerages sometimes show these separately—confirm via your platform’s fee disclosure (“sample/illustrative”: spreads can range from 0.1% for liquid Treasurys to 1%+ for thinly traded corporates or municipals).
Accrued interest compensates sellers for coupons earned since the last payment. This is paid by the buyer at settlement and received back at the next coupon date.
U.S. investors pay federal income tax on interest from most bonds; Treasurys generally exempt you from state/local taxes. Municipal bonds may offer federal and/or state exemptions, especially if you reside in the issuing state.
Interest-rate risk: Bond prices fall as rates rise; measure with duration and convexity. Long-duration bonds are more sensitive.
Credit/default risk: Higher for high yield (“junk”) bonds, lower for Treasurys/investment grade. Use ratings as a guide but assess issuer outlook and event risk.
Call/reinvestment risk: Callable bonds can be redeemed early by the issuer, often when rates fall, leaving you to reinvest at lower yields (affects yield to worst, or YTW).
Liquidity risk: Thinly-traded bonds may be hard to sell without price concessions; check recent TRACE activity or bid-ask spreads.
Inflation risk: Rising prices can erode real returns, unless you own inflation-protected bonds (e.g., TIPS).
Currency risk: Relevant if you buy non-USD issues—currency moves affect returns.
Alternatives & Comparisons
Side-by-Side
Option
Access
Risk/Return
Liquidity
Fee Structure
Income
Individual Bonds
Direct broker/auction
Issuer rate+credit
Secondary market (variable)
Markup/commission (“sample/illustrative”)
Coupons, principal at maturity
Bond Funds/ETFs
Broker/platform
Portfolio avg.; subject to YTM/YTW, duration drift
Mutual fund (end of day); ETF (secondary market intraday)
Expense ratio, bid-ask (ETFs)
Monthly/quarterly distributions; no set principal date
CDs/Money Market Funds
Bank/broker for CDs; broker/investment platform for MMFs
Very low risk; limited return
CDs: penalty for early withdrawal; MMFs: daily liquidity
No spread for CDs; MMFs have expense ratios
Monthly/quarterly; CDs pay at term
How to Evaluate a Bond (Foundations)
Review issuer credit rating and recent rating actions/watchlists (investment grade vs high yield).
Compare coupon type (fixed or floating), frequency, and YTM/YTW to similar bonds and the current yield curve.
Analyze duration and convexity to estimate price sensitivity to rate changes.
Assess call/put schedules, sinking fund presence, and any restrictive covenants in offering documents.
Check par value, clean/dirty price, accrued interest, OID, and liquidity through trading system data (e.g., FINRA TRACE for U.S. corporates).
Consider tax-equivalent yield, especially when comparing taxable vs tax-exempt options.
Can individuals buy bonds directly from the U.S. government?
Yes, individuals can purchase Treasurys and Savings Bonds directly from the U.S. Treasury using TreasuryDirect (official).
No brokerage is needed for new issues; bid types include noncompetitive and competitive (auctions).
How are bond yields calculated?
Current yield = coupon divided by market price.
Yield to maturity (YTM) includes all future coupon payments and capital gains/losses, discounting to present value. Specialized calculators or spreadsheets are used for precise figures.
What affects a bond's price after issue?
Market interest rates (movements shift prices in the opposite direction of rates).
Changes in issuer credit rating or outlook.
Supply/demand and overall market liquidity (TRACE activity).
Are bond funds safer than individual bonds?
Funds offer instant diversification, professional management, and daily liquidity.
However, unlike holding a bond to maturity, there is no guarantee of principal in funds; price and income vary with market conditions and portfolio duration.
Frequently Asked Questions
Can I buy a single bond for less than $1,000?
Some U.S. Treasurys and agency bonds are available in $100 minimum increments. Most corporate and municipal bonds require $1,000 or higher per bond.
Is bond interest paid monthly?
Bonds usually pay coupons semiannually, but schedules can vary. Check the prospectus/official statement for details.
How do I report bond interest on my taxes?
Interest from most bonds is reported as ordinary income; OID and capital gains may require additional forms. Always check with the IRS homepage (official) for up-to-date guidance.
How do I find out if a bond is callable?
Check the bond’s official disclosure or offering prospectus for call dates, yield to worst (YTW), and make-whole provisions.
Buying bonds is an accessible way to diversify portfolios, generate income, and manage interest rate or credit risk—but always review official disclosures, tax implications, and potential costs before proceeding.
Consider your risk tolerance, time horizon, and liquidity needs when selecting individual bonds versus bond funds. Verify all current-year regulations, taxation, and settlement conventions before acting.
