Why do bonds have a high minimum investment requirement?

Question

I can easily buy 1 share of a stock. The minimum investment amount for a stock is the price of one share (or even less, if one's broker allows the purchase of fractional shares). Lots of shares are priced below $100, so stock investment is accessible even to very small retail investors. But with bonds, there is a rather high minimum investment requirement. At my broker, the minimum investment for each bond is $5000. Is there any fundamental reason why bonds have a high minimum investment requirement compared to stocks?

I am rather surprised that there are no "fractional bonds" like fractional shares. A low minimum investment requirement could make bond investment more accessible. Note that I am talking about individual bonds, not bond ETFs.

Answer 1

I assume you're talking about corporate bonds, since treasury bonds can be bought in $100 increments...

There's probably not one definitive reason - meaning there's no intrinsic property that prevents bonds from trading in smaller increments; just inertia and lack of demand.

Bonds are much more commonly traded by larger financial institutions that have no issues trading them in $1,000 increments (p.s. that's the increment from my broker; yours may just want to reduce transaction overhead by requiring a higher minimum). There's no "exchange" to help facilitate trades like there is for stocks, so there's not the same economy of scale as there is for stocks.

If there were more demand from smaller retail investors for smaller corporate bonds increments, the supply market would likely take advantage of that need. Without sufficient demand, the $1,000 increment seems to work just fine.

Answer 2

It just comes down to lack of demand due to the immateriality of buying a tiny piece of a bond.

At the retail investor level, the impact of purchasing a bond over simply keeping funds in an interest-bearing savings account is nominally minimal. By that I mean - $100 invested in a 1 year bond earning 2.5% makes you $2.50 in interest, compared with $100 invested in a savings account earning 0.5% in interest earns you $0.50. Yes, the bond earns you 5x as much... but that 5x couldn't buy you a cup of coffee. So purchasing a bond at $100 increments has no significant inherent value.

Further, many brokers can set you up to accumulate funds [either through deposited interest or automatic paycheque withdrawal, etc.], and then buy a new incremental investment amount once you have enough to do so. So in the example above, maybe it takes you 6 months to accumulate the $1k that a broker might need to purchase a bond. The lost interest income using above numbers would be $1,000 in capital * 2% interest premium lost * 6 / 12 months * 1/2 [because mathematically a steady accumulating balance has an average balance of half of the ending balance] = $5. So every 6 months, you lose $5 in interest from this lack of flexibility - not even worth mentioning.

And that tiny amount of lost interest can't really get magnified into larger numbers, because as soon as you have larger numbers in play, you would be able to reach that $1k [or $5k] increment faster. If your broker's limit was $5k instead of $1k, then your loss might by $50 a year, but even then you likely have access to GIC's or similar products that even more closely mirror the rates from bonds you're looking at. Or probably more commonly, you could simply buy a bond fund which likely has no such restrictions.