Treasury Bond Auctions
Normally, the Treasury sells bonds at auction four times a year. The dates and the total value of the bonds issued are announced in major newspapers and financial publications.
A bond sale is actually two simultaneous auctions, with primary dealers as the main bidders. Primary dealers are large, institutional investors that trade directly with the Treasury. Before the auction, they submit competitive bids, which state the lowest yield they'll accept. (Yield, you'll recall from economics class, is your return on an investment. It equals the interest the bond earns divided by its purchase price). For example, Cantor Fitzgerald might bid for a $2 billion bond and a yield of 4.15 percent. Bids are taken until the auction starts. At that time, the Treasury uses these bids to set the bonds' yield, and thus the interest rate.
If you're not a large financial institution, you can take part in an auction by placing a noncompetitive bid, which is simply the dollar amount of the bond you want. With a noncompetitive bid, you accept whatever yield and interest rate are established, which you won't know until the auction closes. This transaction is conducted conveniently through the Treasury's online service, TreasuryDirect. During an auction, all noncompetitive bids are filled first. Competitive bids are then doled out until the entire issue has been sold.
But as we said, bond prices change over time. You can sell your bond at any time before it matures to take advantage of this fact. For example, suppose you own a bond that pays 5 percent interest. Newly issued bonds, however, are paying 4 percent interest. Your bond, with its greater return, is comparatively more valuable. You could sell it at a premium, a price higher than its face value that depends on the inflation rate, predicted interest rates and other factors. The buyer also pays you the interest the bond has accrued since the last payment date.
On the other hand, if new issues are returning 6 percent interest, your bond is less valuable. You might decide to sell it at a loss, or a discount, in order to buy a higher-returning bond.
To trade in bonds requires a primary dealer or a broker. To expand beyond bonds to more complex investment packages takes other expert advisers. Invest a few minutes reading the next page for a look at how bond brokers and mutual funds work.