Three Ways Individuals Buy Bonds: Direct, OTC, Bond ETFs Compared

TL;DR

• Individuals can access bonds via (1) public or government direct purchases, (2) over-the-counter bond trading, or (3) buying bond ETFs.
• Each method differs in trading convenience, liquidity, fees, and tax treatment, so choose according to goals, time horizon, and risk.

1) Direct public and government bond purchases: steps and features

1. Setup: Open a securities account or a bank account that supports bond trading. Remote account opening is often available, so prepare identification documents.
2. Check information: Review the public bond or government bond issuance notice. Confirm issuance terms (maturity, interest payment method, subscription schedule) from the issuer notice.
3. Subscription/purchase: Apply during the subscription period through your securities firm or bank order interface. Government bonds may have dedicated channels, so follow your broker's customer service guidance.
4. Allocation and settlement: Check allocation results and ensure settlement on the specified date. If held to maturity, principal and interest are received.

Features: Principal repayment and interest structure are clear, and holding to maturity provides interest income. Liquidity can be limited, so consider resale difficulty.

2) Over-the-counter bond trading: steps and cautions

1. Choose a broker: Select a securities firm that supports OTC bond trading. Check available issues and fees in advance.
2. Consultation and order: Place orders for desired issues and quantities via the broker's bond desk or HTS/MTS. Prices are executed via quote-based matching.
3. Settlement and custody: After trade execution, cash is debited on the settlement date and bonds are electronically registered in the securities account.

Caution: OTC markets can have wide bid-ask spreads, so short-term trading carries price volatility and liquidity risk. Verify issuer credit ratings and maturity structure.

3) Access via bond ETFs: simple steps and pros/cons

1. Account setup: Prepare a securities account that allows stock trading.
2. Research funds: Bond ETFs differ in portfolio composition, average maturity, and expense ratios. Review ETF prospectuses and management reports.
3. Place buy order: Buy through MTS/HTS like a stock using market or limit orders.

Advantages: Enables small-amount, diversified exposure and generally higher liquidity, allowing sales during market hours. Disadvantages: ETF management fees and underlying interest rate risk affect returns.

Common cautions: taxes, fees, and risks

• Confirm current rules on interest income and capital gains tax rates, transaction fees, and management fees with your broker and the tax authority. Specific figures may change, so confirm the latest standards.
• Consider maturity, credit risk, and interest rate risk, and decide your investment period and purpose before choosing a method (direct, OTC, ETF).

This article is for informational purposes and is not investment advice.