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      4. A Primer on the Sale Process

        Municipal Bonds: A Primer on the Liquidation Process

        Unlike stocks, which are continuously quoted and traded on national exchanges, municipal bonds generally trade over the counter and less frequently. This is true for several reasons:

        • There are many more municipal bonds than stocks – over a million versus several thousand.
        • Similarly, the amounts of each security available are very different. While a public company typically has millions of shares outstanding, a municipal bond issue often has far fewer bonds outstanding.
        • Finally, unlike stocks, which are traded frequently by investors, municipal bonds tend to be a “buy and hold” product, so there are relatively few trades per day in the municipal bond market. The vast majority of individual bonds do not trade on a given day.

        As a result, the process for selling municipal bonds is very different from selling stocks.

        The Typical Sales Process for Municipal Bonds

        When a customer wants to sell publicly traded stock, their sell order is generally executed within seconds of being placed. Conversely, selling municipal bonds generally involves a bid solicitation process. Specifically, when a customer decides to sell a municipal bond and places an order with their financial advisor, the advisor’s brokerage firm must actively look for bids to buy that bond. To find the best bid, one of the firm’s bond traders places the bond out for bid. Most firms do this through an electronic trading platform – the platform Raymond James uses is used by more than 100 bond dealers throughout the country. In some cases, one trader may bid on bonds placed on the system by another trader at the same broker/dealer.

        The Current Market Environment’s Impact on Municipal Bond Sales

        The impact of today’s challenging economic environment on some issuers’ ability to meet their obligations has impacted the current municipal bond market. As a result, the liquidity of some municipal bonds is more limited than usual. In some instances, a bond that is for sale does not receive any bids, or may receive a bid that is, in the trading firm’s opinion, not reflective of a fair price for the bond, even if it is the best available bid in the market at the time. As a result, a customer seeking to sell a bond may be left with a difficult choice: either sell the bond at a price below perceived or expected value, or hold the bond in anticipation of more buyers (and potentially better bids) entering the market, though there can be no assurance that this will occur. In fact, it is possible that the bid will be lower later or there may not be a bid available.

        As with any bid, the customer may either accept the accommodation bid or reject it and attempt to sell the bond at a later time. If the customer accepts the accommodation bid, the purchasing firm effectively buys the bond for its own account and will thereafter seek to sell the bonds. Depending on subsequent market conditions, the firm will earn a profit or suffer a loss when it ultimately sells the bond.

        Making Sound Decisions

        Raymond James encourages investors to work with their personal financial advisor when making decisions about buying or selling any security. These decisions should be guided by an overall financial plan specific to individual objectives, tax considerations and risk tolerance, as well as to market environments that may affect investments.

        If you have any questions regarding the process for selling municipal bonds at Raymond James, please consult your financial advisor.

        For more information offered by our fixed income department or to obtain a sample copy of a commentary, please contact your financial advisor or use the convenient Office Locator to find our office(s) nearest you.

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