Corporate Bond Trading Costs: A Peek Behind the Curtain


  • Paul Schultz

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    • University of Notre Dame. Financial support from TIAA-CREF, The University of Chicago, and The University of Notre Dame made this paper possible. Useful comments were provided by Shane Corwin, Amy Edwards, Douglas Fore, Jeffrey Harris, Francis Longstaff, Andrew Nybo, Joseph Sinkey, René Stulz (the editor), Arthur Warga, and seminar participants at the University of Georgia, Washington University, and the 1999 Western Finance Association Meetings. Steve Sterman provided helpful background information on the corporate bond market. An anonymous referee provided numerous helpful comments. I am responsible for any remaining blunders and so forth.


In this paper, I use institutional corporate bond trade data to estimate transactions costs in the over-the-counter bond market. I find average round-trip trading costs to be about $0.27 per $100 of par value. Trading costs are lower for larger trades. Small institutions pay more to trade than large institutions, all else being equal. Small bond dealers charge more than large ones. I find no evidence that trading costs more for lower-rated bonds.