Bond markups and markdowns are what a dealer earns on a bond trade, built into the price instead of listed as a separate commission. When you buy, the dealer charges you more than the bond’s prevailing market price, and the difference is the markup. When you sell, the dealer pays you less than the market price, and the difference is the markdown. Pay $1,020 for a bond worth $1,000 and you’ve paid a 2% markup. Sell that same bond back for $980 and you’ve absorbed a 2% markdown. The dealer’s profit sits inside the price on both ends.
Why There’s No Commission Line
Most bond trades with individual investors are principal transactions. The dealer buys the bond into its own inventory and then sells it to you at a higher price, or buys yours at a lower price than it can resell for. The firm is trading with you directly, not matching you with another investor and charging a commission for the introduction.
That structure is why bond trading costs feel invisible compared to stock commissions. There is no separate line item. The compensation is the spread between the market price and the price you execute at, and the only way to know what you paid is to know what the market price was.
What Determines the Size of Your Markup
Markups vary widely from one trade to the next. A handful of factors do most of the work.
- Liquidity. Bonds that trade frequently carry tighter spreads because the dealer can resell them easily. A U.S. Treasury might cost a fraction of a percent; a small municipal issue from a rural county can cost several times that.
- Credit quality. Lower-rated bonds command wider markups because the dealer takes on more risk holding them.
- Maturity. Longer-term bonds generally carry higher markups because their prices are more sensitive to interest rate moves.
- Trade size. Smaller trades face higher percentage markups. A $5,000 purchase might carry a 1.5% markup while a $100,000 trade in the same bond might cost 0.5%, because the dealer’s fixed costs are roughly the same either way.
- Bond type. Markups on municipal and corporate bonds tend to be similar, with dealers often charging roughly 25 basis points (0.25%) on standard trades when expressed as a yield adjustment. Treasuries typically carry the smallest markups.1Municipal Securities Rulemaking Board. A Comparison of Transaction Costs for Municipal Securities and Corporate Bonds
These factors stack. A small trade in a thinly traded, long-maturity, lower-rated bond will cost far more than a large trade in a recently issued Treasury. Knowing where your trade sits on each dimension gives you a reasonable expectation before you execute.
What Counts as a Fair Price
FINRA’s 5% policy is the most commonly referenced benchmark, and it is widely misunderstood. It is a guideline, not a cap. A markup above 5% creates a presumption that the charge is unfair, but a markup well below 5% can also violate the rules depending on the circumstances.2Financial Industry Regulatory Authority. FINRA Rule 2121 – Fair Prices and Commissions Bond markups are customarily lower than stock markups of the same size, so a 4% charge on a straightforward corporate bond trade could still draw scrutiny.
FINRA weighs several things together: the type of security, how available it is in the market, the bond’s price, the transaction size, whether the markup was disclosed in advance, the firm’s overall pricing pattern, and the cost of running the firm’s operations.2Financial Industry Regulatory Authority. FINRA Rule 2121 – Fair Prices and Commissions No single factor is decisive.
For municipal bonds, MSRB Rule G-30 imposes a parallel requirement: dealers must transact at prices that are fair and reasonable relative to the prevailing market price. The MSRB treats the most important test as whether the yield you receive is comparable to yields on similar-quality, similar-maturity bonds available in the market at the same time.3Municipal Securities Rulemaking Board. MSRB Rule G-30 – Prices and Commissions A dealer who overpaid to acquire the bond and passed that cost on to you can still violate the rule even if its own margin was modest.
What Your Confirmation Will and Won’t Show
Since May 2018, dealers have had to disclose markups and markdowns on confirmations for most retail bond trades. For corporate and agency bonds, FINRA Rule 2232 requires disclosure when the dealer executes an offsetting principal trade in the same bond on the same trading day in a size that meets or exceeds yours.4Financial Industry Regulatory Authority. Fixed Income Confirmation Disclosure – Frequently Asked Questions When disclosure is triggered, the confirmation shows the markup or markdown as both a dollar amount and a percentage of the prevailing market price.5Financial Industry Regulatory Authority. FINRA Rule 2232 – Customer Confirmations For municipal bonds, MSRB Rule G-15 requires similar disclosure under the same same-day-offset condition.6Municipal Securities Rulemaking Board. Mark-Up Disclosure and Trading in the Municipal Bond Market
The same-day offset is the catch. If the dealer bought the bond into inventory three weeks ago and sells it to you today, no markup appears on your confirmation. The dealer still earned a markup; the rule just doesn’t require it to be calculated and shown. New-issue bonds sold at the offering price on the day of the offering are also exempt from markup disclosure under both rules.5Financial Industry Regulatory Authority. FINRA Rule 2232 – Customer Confirmations7Municipal Securities Rulemaking Board. MSRB Rule G-15 – Confirmation, Clearance, Settlement and Other Uniform Practice Requirements with Respect to Transactions with Customers The upshot: a meaningful share of retail bond trades carry no markup number on the confirmation at all.
How to Check a Bond’s Price Before You Trade
Because disclosure has gaps, learning to verify prices yourself is the single most useful skill for a bond buyer. Two free tools make it possible.
For municipal bonds, the MSRB’s Electronic Municipal Market Access system (EMMA, at emma.msrb.org) publishes real-time trade prices, official disclosure documents, and credit ratings for more than a million outstanding municipal securities. Its price discovery tool lets you compare trades in similar bonds.8Municipal Securities Rulemaking Board. About EMMA
For corporate bonds, FINRA’s TRACE (Trade Reporting and Compliance Engine) data is available through FINRA’s market data center. TRACE captures transaction-level data on virtually all corporate bond trades, so you can look up recent prices for a specific bond before placing an order.
The workflow is simple. Before you buy or sell, pull up the CUSIP on EMMA or TRACE and look at recent transaction prices. If the most recent trades printed at $101 and your dealer quotes $103, you’re looking at roughly a 2% markup. If the bond hasn’t traded in weeks, use comparable bonds (similar credit, maturity, and coupon) as a proxy. A few minutes of this before the trade can save real money, especially on less liquid issues where markups run widest.
How the Markup Affects Your Taxes
The markup you pay buying a bond becomes part of your cost basis. The IRS defines the basis of stocks and bonds as the purchase price plus any costs of purchase, including commissions and recording or transfer fees.9Internal Revenue Service. Topic No. 703 – Basis of Assets Because the markup is baked into the price rather than broken out, it’s automatically in your basis.
That matters at sale or maturity. A higher basis means a smaller taxable gain or a larger deductible loss. Pay $1,020 for a bond with a $1,000 face value and hold it to maturity at par, and you have a $20 capital loss. The timing and character of that deduction depend on your broader tax picture, and for bonds bought above face value you may be able to amortize the premium over the remaining life of the bond, reducing your taxable interest income each year.10Internal Revenue Service. Publication 551 – Basis of Assets
Markdowns work the same way in reverse. If a dealer pays you $980 for a bond with a $1,000 market price, your sale proceeds are $980 and your gain or loss is calculated from that lower figure. The markdown increases your loss or shrinks your gain. Either way, dealer compensation flows through to your after-tax return, which is one more reason to track the actual prices you pay and receive rather than taking the confirmation at face value.