Quarterly Reports: Spreads

a timely accounting of timeless principles of personal finance

Everything has two prices: the price you can buy it for and the price you can sell it for. In the difference between these two--the spread--resides the entire world of commerce. Retailing, wholesaling, garage-saling--the works.

In much of the business world, this difference is called the markup. On Wall Street, it is the spread. In Paris, I'd guess, la différence (whence the cheer of the French brokerage community, Vive la différence!).

This is a column about spreads, with particular reference to the higher-priced spreads. Listen up: Your fortune is at stake here.

Spreading it Thick

The wider the spread, the tougher it is to make money.

If you're buying a dollar, it costs just a dollar. Same with selling a dollar. That's what makes dollars such an efficient means of exchange: In everyday transactions, there is no spread. Not so if you're buying gold or stocks or options or zero-coupon bonds, or if your pension fund is buying them for you.

If you're buying gold (I'll get back to the zero-coupon bonds), you would, as I write this, pay $347 for a one-ounce bar or sell it for $330. That is the spread--$330 bid, $347 asked--at Ruffco, a courteous and trustworthy outfit that specializes in precious metals for the little guy. Check around and you may find spreads a little wider or narrower, but you get the idea. For its trouble and the cost of maintaining its toll-free line (800-722-7833), Ruffco takes $17 per ounce--about five percent. That's its spread.

There is also a $15-per-order handling fee, whether you buy a single ounce or 50--and if you do buy 50, you may be able to shave a few bucks off the spread, so you can see that in the financial world, as in the rest of life, there are economy sizes and quantity discounts.

Add about seven dollars in postage when you trot down to the post office to accept your gold bar, which is mailed registered, insured, postage-collect, and you get the total price for buying the ounce: $369. Total price for selling it, less postage and one percent handling charge: about $320.

"How's gold?" you shout up to the mythical trader in the sky.

"How much you interested in?" he booms back from across the heavens.

"One big one," you yell over the din.

"Twenty to sixty-nine" ($320 bid, $369 asked), he roars, figuring you're hip to the jargon.

Whereupon you have to decide, if you're thinking of buying a single ounce of gold, whether it would be smarter to buy ten ounces instead and reap economies of scale (it costs only three dollars more to mail and insure ten ounces than one) ... or to buy without accepting physical delivery of the metal (call 800-223-1080 outside New York to buy Citibank gold certificates on your Visa or MasterCard, with a spread generally less than 50 cents an ounce but a three percent commission and an annual storage charge) ... or (my favorite) not to buy at all.

If gold hits $3000 one day, the spread and commissions won't have made any difference. In the meantime, though, gold would have to rise 15 percent just for you to break even buying a single ounce through the mail. That is a hefty handicap in a world where earning 15 percent on your money safely, after tax, takes three years.

Spreads--and transaction costs such as commissions, postage and handling--make life rough for the small investor.

They even make life rough for the big investor. The reason the average money manager does a little worse than average investing the millions or billions entrusted to him is that the averages against which he's measured, such as the Dow Jones industrial average and the Standard & Poor's 500, have an edge: They're just averages. They do no buying or selling, pay no brokerage commissions, suffer no spreads. They're even immune from that tiny but annoying penny-per-$300 levy you may never even have noticed that the Securities and Exchange Commission chips off all sales of New York and American stock-exchange stocks. A penny per $300 here and a penny per $300 there--sell $3900 worth of stock and you're hit for 13 cents--but over the course of the year, it mounts up: $37,000,000. (Not that the Treasury can't use the extra dough.)

Penny Stocks, Megaspreads

Here is the headline of the March 26 issue of the $150-a-year Penny Stock Ventures newsletter: "What Your Ira Needs is a Good Penny stock." That is exactly what your IRA doesn't need, of course, because penny stocks--typically thought of as those selling for less than three dollars--are almost invariably risky. If you buy them, you're better off buying them outside your IRA and filling your IRA with more conservative investments. That is because--at least the way the tax laws read as this is written--if a risky investment does pay off, it will be awarded favorable long-term capital-gains-tax treatment outside an IRA (inside an IRA, the gain will eventually be fully taxed as ordinary income); and if, as is more likely, you lose the whole thing, you'll at least be able to get Uncle Sam to shoulder some of the loss by deducting all or part of it from your taxable income (no such deduction is available for losses suffered under the umbrella of an IRA).

But forget that. What about penny stocks themselves?

On the back page of Penny Stock Ventures (37 Van Reipen Avenue, Jersey City, New Jersey 07306) is a list of all its featured recommendations since July 1982. The first one, for example, Gen'l Dev. (General Devices of Norristown, Pennsylvania), is shown as having been two dollars bid when it was recommended in 1982 and three dollars bid when it was recommended for sale some unspecified time later, for a gain of 50 percent.

The thing about the 50 percent gain in Gen'l Dev., as I'm sure Penny Stock Ventures would agree, is that it's not really a 50 percent gain.

Say you had gone to buy 500 shares when it was recommended at two. Two was the "bid." The spread was probably something like "two to a quarter," meaning two dollars a share if you were selling but $2.25 if you were buying--and you were buying.

But chances are you would have paid at least an eighth of a dollar more pershare--$2.375--because when a little stock is recommended in a newsletter and the phone starts to ring at the market maker's trading desk, the market maker does what any good market maker should: He senses an increase in demand, and unless he's also getting a lot of calls from people wanting to sell, he bumps up the price. Supply and demand. You know.

Often, by the time you get your crummy 500 shares, the stock has risen substantially. But let's say it was up just an eighth. You've now paid $2.375 a share for the stock (not two dollars)--plus a commission. The size of the commission will depend on your broker, but let's say he had a heart and charged you only $32.50. That brings your price per share to $2.44.

Now, some time later, the bid has climbed to three dollars and it is recommended for sale. Again the trader's phones light up, but this time he's notched the stock down an eighth by the time you reach him, and you get, after commission, $2.81 a share. Net gain before taxes: 15 percent.

So the spread and the commissions cut a 50 percent rise in the stock--for it had assuredly become 50 percent more expensive to buy--to a 15 percent real gain before taxes.

Today, Gen'l Dev. is "one and a half to three quarters"--$1.50 if you want to sell it, $1.75 if you want to buy it--while the stodgy Dow Jones average, in the same time period, has more than doubled and has paid three and a half years' worth of dividends besides. But no one ever said penny stocks were forever. You get in, take your profit and get out.

Had you invested $1000 in each of the 81 Penny Stock Ventures recommendations featured from July 1982 to March 1986 and sold when sale was recommended (or held on if it was not), you would have made $31,000 before allowing for spreads and commissions but would have barely broken even, if that, after.

One recent recommendation, National Superstars, Inc., is quoted three eighths of a dollar to five eighths. That's $625 if you want to buy 1000 shares, $375 if you want to sell them. So if you do buy 1000 shares for $655, after commission, and sell them for $345, after commission, you're down 47 percent even if the stock holds firm (which, given the nature of its business--selling financial-seminar tapes on late-night TV--something tells me it may not over the long run do).

I own some penny stocks--most of which, sadly, were not penny stocks when I bought them. One, Offshore Logistics, was recommended by a successful investment banker in Houston at $27 a share. The spread then was an eighth or a quarter--12.5 cents or 25 cents a share--which, as a percentage of the whole, was insignificant.

Today, you can buy Offshore Logistics (please!) for around $1.25 a share--or sell it for 75 cents. The spread has widened to half a point--50 cents a share--which works out to 40 percent (before commissions).

Mystical Question #1. Is it insane to buy a stock that would instantly lose 40 percent in value were you to turn around and sell it? Absolutely--unless it goes back to $27 someday (and Sirhan Sirhan becomes mayor of New York, New York).

Mystical Question #2. How come the spread on issues like these is so wide? Because the market makers are pigs.

OK, that's a little harsh--cowardice plays a part in it, too. The wider the spread, the less risk the market maker takes.

Who Sets the Spread?

On the stock exchanges, prices are set more or less by supply and demand, with a little help from a fellow called the specialist. The specialist chips an eighth of a dollar off most trades he's involved with, but on a $20 or $40 or $80 stock, who cares? That's his cut for taking the risk of maintaining an orderly market when buyers and sellers don't show up at his post at the same time. Not that a specialist ever went broke taking that risk, as far as I know--specialists mint money--but why quibble over an eighth?

For listed securities, then--stocks and bonds traded on the New York and American stock exchanges--spreads are not much of an issue. One guy is offering to buy shares at 47-1/8, another is offering to sell them at 47-3/8, so the spread is described as "an eighth/three eighths." Big deal.

But there are another 15,000-plus stocks and tens of thousands of bond issues traded O.T.C.--over the counter. (Well, O.T.P., really--over the phone.) There the spreads can range from an eighth of a dollar on a $30 stock like Apple Computer--which works out to just half a percent--to a nickel spread on a stock like Magnum Resources, quoted two cents to seven cents. That's two cents if you want to sell shares, seven if you want to buy them--a 250 percent spread.

Several things determine the spread in a security, but the overriding one is volume. If lots of shares are being bought and sold each day, week in and week out, the spread will be narrow, because lots of market makers--firms you know, like Merrill Lynch, and firms you may not know, like Troster Singer, and firms you surely don't know, like Mayer & Schweitzer--will be competing for the business.

If there are only three or four market makers in a stock, they may not beat one another over the head to narrow the spread. They may even, tacitly or not so tacitly, agree that "two to three quarters [two dollars bid, $2.75 asked] looks about right." Who's to know? We're talking major backwaters in thousands of these stocks. Unlike the most actively traded over-the-counter issues, whose best bid and asked prices are instantly available on every brokerage computer screen in the capitalist world (and even many of them sport gaping spreads), there are 11,000 scarcely noticed public issues listed only in the Pink Sheets each day.

The Pink Sheets, in this age of instant electronic communication, are indeed pink, as they have been since the Thirties. (The yellow sheets are for corporate bonds and the blue sheets for municipal bonds.) If a brokerage firm wants to be listed as a market maker in the stock of Natural Beauty Landscaping, as eight firms not long ago did, it just lets the National Quotation Bureau of Jersey City know by two o'clock the prior afternoon and pays the bureau 31 cents to list its name and toll free number. (I'm oversimplifying, but this is more or less how it works.) Cry not for the National Quotation Bureau: That's 31 cents a line times several market makers in each of 15,000 issues every trading day; and then $42 a month, plus delivery to each of the brokerage offices around the country that subscribe--and every office does. When you call your broker and ask to buy 1000 Natural Beauty, the order he writes up gets routed to his firm's trading desk, where a very junior trader looks in the Pink Sheets to see who the hell has any for sale.

Then, if he's not too busy, he'll call three or four of the market makers listed in search of the lowest price, as he should, or, if he is a little busy, he'll just close his eyes and call whichever one his finger lands on. Hey, it's not his money--why should he beat his brains out trying to save you $50?

Some market makers include bid and asked-prices in the Pink Sheets; others prefer not to tip their hands. Of the five who recently listed prices for Natural Beauty Landscaping (the three others chose not to), two were asking 12 cents a share, two were asking 14 cents and one wanted 15 cents. That's if you were buying. If you were a seller, one was offering seven cents a share, three were offering eight cents and one was offering a dime.

There's usually less variation; but in this case, presumably, your broker's trader would, at the very least, call one of the outfits that were asking just 12 cents (Fitzgerald DeArman & Roberts of Kansas City or Cutler Hunsaker of Salt Lake City) and perhaps check, as well, with the three that had not included prices with their listings.

The firms asking just 12 cents for Natural Beauty may have been doing so because they had a little more Natural Beauty on hand than they would like. The firm offering to pay a dime for shares (Olsen Payne, also of Salt Lake City) was probably in just the opposite spot. It may previously have sold all the Natural Beauty shares it had, and more, and now wanted to cover its short position and perhaps even get a few shares back on the shelf.

It all sounds capitalist and freewheeling in the extreme until you notice how often the spreads are (A) wide and (B) virtually in lock step among the various market makers, the disparate quotes on Natural Beauty notwithstanding. I'm not suggesting that the spreads are explicitly rigged--though, inevitably, some of that goes on--but price-fixing need not always be explicit. In many thousands of inactively traded stocks, it's probably not unfair to say, at the least, market makers show little interest in taking much risk or rocking the boat.

For example, rather than compete by narrowing their spreads and offering the best prices, which would benefit you, some market makers will entertain the traders at your broker's firm with the hope that, when you place an order, the trader who gets it will first call the guy who took him to Dreamgirls--and maybe not bother to call anybody else. Hockey tickets, limos, champagne ... one young trader at a now-defunct discount brokerage house was given such carte blanche that he was allegedly able to attract the interest of Morgan Fairchild. (A spokesperson for Miss Fairchild cannot recall her ever having dated a discount broker.)

What kind of way is this to do business? Far better, some brokerage firms have decided, to take the payoff themselves--not in champagne but in cash payments of as much as a nickel a share on every share funneled through a particular market maker. Market makers call this "paying for order flow" and are happy to do it--it was their idea to do it--because if the orders flow through them, so do the profits.

One large discount broker, Fidelity Brokerage Services, was offered a penny and a half a share to trade with a large O.T.C. market maker, "and that," says a Fidelity officer, "was just for openers--but we said no; we didn't want to pursue it." For Fidelity, that would have been an extra $4,000,000 or so annually (or $12,000,000 at a nickel a share)--pure profit--just for directing its O.T.C. trades to a particular market maker.

Other brokerage firms have been unable to resist. The rationalization is that, hey, the spreads are the same everywhere, so why not do business with the firm that offers the biggest kickback?

But if the market makers can afford to give back a nickel a share on each spread--even the spreads that are only an eighth of a dollar (12.5 cents), as many of them are--maybe the spreads are a nickel a share too wide.

Zero Coupons

Spreads are less visible and surely less bitched about than commissions, but they're often by far the more important cost.

Take bonds. Many firms will charge you as little as $30 or $40 to buy or sell ten bonds. If you buy or sell an equivalent amount of stock--$10,000 worth--the commission could run to $200 or more.

What you never see on your confirmation slip, and what many brokers are reluctant to disclose even if you ask, is the spread. Ask your broker for a price on such and such number of bonds, and he will respond with a question of his own: Are you buying or selling? If you say you'd like both prices, the bid and the ask, you're likely to be told that his trading desk won't give quotes that way.

Even if it did, and you saw what it was really costing you to trade the bonds, how likely would you be to open an account at another brokerage firm just to shave a few bucks off the spread--if you could find another broker that would shave the spread--and how much could we be talking about here, anyway?

I called a broker from whom I had purchased for my Keogh plan $250,000 of zero-coupon bonds maturing May 15, 2007. A Keogh plan is like an IRA for people with income from self-employment; zero-coupon bonds pay no interest (zero coupon, dummy), and so don't cost much to buy. They are the actively traded offspring of long-term Treasury bonds (never mind how they offsprung*), and these particular ones cost me $21,450 in 1985, geared to compound at 11.8 percent to their glorious quarter-million-dollar maturity 22 years hence. (Something you buy for $21,450 that grows to $250,000 in 22 years is growing--trust me--at 11.8 percent, compounded.)

But now that interest rates had fallen and zeros needed only to promise to compound at nine percent or so to attract buyers, I could sell mine not for the $21,450 I had paid but for around $37,500. At that price, a buyer holding on for 21 years until the glorious maturity would have seen his money compound at a little more than nine percent, while I, meanwhile, would have turned a $16,000 profit on $21,450 in a year and a half. Not enough to make up for Offshore Logistics, perhaps, but some thing.

Of course, there would be commissions. My broker offered to do the trade "for an eighth," meaning $312.50,** to cover the cost of the three minutes he and his trading desk would spend handling this transaction. But what's $312.50 when you're talking about a $16,000 profit? (Never mind that it would have been the same $312.50 if we had been talking a $16,000 loss.) And, really, I'm not being fair. The brokerage has $50-a-square-foot rent and megamegacomputers and $1,000,000 bonuses and a national TV adcampaign to pay for. So $312.50 (and maybe a similar commission when I bought the bonds) is not so bad.

But what about the spread?

"What spread?" my broker grins over the phone.

You've got to understand: My broker and I are very good friends. It has given me enormous pleasure over the years to see his net worth mount.

"The spread," I persist.

"Oh, the spread!" he says. "Hold on."

My broker has never, ever dealt anything but fairly with me, but he has put he me on hold. And even then, he has the ability to make me feel as if I'm his only client. Sometimes he puts me on hold to exchange a few more words with someone else he has on hold--he always has calls waiting--but sometimes, as now, he puts me on hold knowing I'm impatient and am likely to let him off the hook.

"You there?" he comes back half a minute later.

"Yeah," I disappoint him.

"It's a great life if you don't weaken," he says--one of his stock phrases--apropos of nothing in particular, which is exactly what he hopes we will now discuss.

It's not that he means to conceal the spread his firm maintains in trading these bonds or avoid the hassle involved in finding it out. What he hopes to avoid, I think, is the inevitable bitching and moaning he knows he'll have to sit through, and the same old discussion where I say the spread's outrageous and he says, "Hey, if you think it's an easy business, go ahead-- set up shop yourself."

"What's the --ing spread?" I remind him gently.

"Oh, -- you," he says. "Hold on." This time, I know he means for me to stay on the line, silently, while he calls his bond trader to find out the spread.

The spread on these zero-coupon bonds turns out to be 45 basis points. A basis point, as you may know, is one hundredth of one percent. A bond that yields 9.02 percent is trading one basis point higher than a bond that yields only 9.01 percent. Right? In this case, the brokerage firm would sell the bonds at a price that would yield the buyer nine percent--or buy them at a lower price that would yield 9.45 percent. I know this can get confusing, but the dialog's a snap:

"Forty-five basis points!" I wail, reaching for my calculator. (My broker, I think, makes a point of not having one nearby.) "That's some spread! What does that work out to in dollars?"

"I don't know," he says, handling our conversation on autopilot. He can talk to me and be hypnotized by his computer screen at the same time.

"Well!" I announce triumphantly, having yet again caught the brokerage industry in its act, "that's a $3400 spread!" Meaning, they would buy the bonds for $3400 less than they would sell them for.

"It is?" mumbles my broker. "Well, I don't know--it's not a round lot. The spread's narrower with a round lot."

(With stocks, 100 shares constitute a round lot. Buy fewer and there's a small nuisance charge to pay. With zero-coupon bonds, though you can buy them in virtually any quantity, the really big players--pension funds and such--deal in multiples of $5,000,000.)

"What's so puny about a quarter-million-dollar face value?" I demand.

"You want to get into this business?" he asks, still on autopilot. "No one's stopping you."

"I mean," I continue, having heard all that before, "it's not as if these were some obscure municipal bonds that traded once every four months." (If they were, the broker might have to hold them in inventory for a while in hope of finding a buyer--collecting interest on them all the while.) "I mean, these things trade like crazy." (If the obscure municipal-bond issue were the equivalent of a flight from Allentown, Pennsylvania, to Omaha, Nebraska--not the sort of route much subject to discounting--my zeros would be the equivalent of New York to Chicago.)

"You're going to Chicago?" my broker chuckles.

"Oh, forget it." I give up.

"Have a nice tr--"

The spread in this case was so wide--it worked out to $37,500 bid, $40,900 asked--that, given my guess that interest rates might continue to decline (and, thus, bond prices continue to rise), I decided to sit tight. Sitting tight, in a world where each transaction clips you for commission, spread and taxes, is often a swift move.

How wide should a spread be?

The spread on Meyers Parking System, Inc., one of the largest parking-lot chains in the country, is 22--26. Buy it for $26, sell it for $22. Ask your broker to punch it up on his computer--NASDAQ symbol MPSI--and you'll see. There are six market makers in the stock, all presumably competing to do trades in Meyers, but the spread, as I write, is still four points. Add in commissions and, on 100 shares, you've got to see Meyers rise from 22 to 27 bid--almost 23 percent--before you begin to make a dime. If it falls five points instead--these things can happen, even in the parking business--you're really hurting.

Why so wide?

With an inactive stock such as Meyers, market makers have a couple of factors to consider. First, if they buy some from you, that ties up capital until they can sell it. With a stock such as Apple, that would be maybe three minutes later; with Meyers, it could be a week or two. To you or me, buying a stock at 22 and selling it, even three weeks later at 26, would more than justify tying up capital. To turn $22 into $26 every three weeks, compounded, would be to turn $22 into $400 by the end of the year.

But market makers are a suspicious bunch, and they figure that if someone wants to buy Meyers Parking System stock, maybe there's a reason. Maybe Meyers is about to announce the condominiumization of all its parking lots.*** Maybe oil's been discovered bubbling through the macadam underneath that '83 LeSabre in the last row on the left.

So even though the market makers in this stock follow the company pretty closely and haven't heard any such rumblings, they're still afraid they'll sell shares at 26--very possibly shares they don't even own, going short--and five minutes later, when they try to buy them back, the stock will be 50.

Anything that dramatic rarely happens--basically, this is a business of buying at 22 and selling at 26--but the wide spread is justified by the notion that someday the market makers might actually (yes!) suffer a loss on a trade or two.

Yet if the market maker occasionally gets blind-sided, so may he occasionally reap a windfall. There he was, having just purchased 1000 shares of Meyers at 22 from a fellow whose reason for selling was no more perspicacious than that he'd gotten sick of waiting for parking-lot stocks to catch on as a Wall Street fad, and he needed some cash to pay his taxes. Now, when he's expecting to sell it to somebody else a few days or weeks later at 26 or so, for a $4000 profit, give or take--now the news of that oil hits, and now, once it's confirmed that the oil is truly bubbling out of the ground and not just leaking from the LeSabre, people are falling all over themselves to buy that 1000 shares not at the 22 he paid or the 26 he had planned to charge but at 50.

So the market's moving up or down, causing that 22-to-26 spread to move up to 38 to 43, say, or down to 16 to 19, probably works in the market maker's favor almost as often as it clips him off side.

Stay in this business long enough, in other words, buying at 22 and selling at 26, and you can put your kids through some very nice schools.

Your bottom line

It's a free country and if, without collusion, the market makers in O.T.C. stocks and corporate and municipal and zero-coupon bonds want to charge us through the nose, well, that's what makes this country great. Somebody's got to pay the 25-billion-dollar tab of running the brokerage industry. Limos and $300 lunches and $600,000 trader salaries and $111,000 broker salaries (that's what the average Merrill Lynch rep with two or more years' experience earned in 1985) don't come from thin air. The tab is paid primarily out of commissions and spreads. A nickel here, $3400 there.

And I say, more power to them (though, if you want to know, even a lot of guys on Wall Street think that the largess is getting a little out of hand).

But it's a free country for you, too.

When it comes to mutual funds, for example, you are free to avoid those that charge sales fees (so-called load funds) in favor of those that don't; you may also know to beware of so-called 12b-l funds that charge no sales commission up front but hit you for an extra percent-and-some every year for "distribution costs."

When it comes to trading stocks, you're free to minimize commissions by placing your trades through a discount broker--or by getting your full-service broker, if you do enough business with him or her, to knock 50 percent or more off the posted rate.

When it comes to stocks and bonds, you're free to complain about the spread. Whining is a good idea, too: Sometimes, the spread is negotiable. Don't let your broker off by accepting the first quote he gives--try to get him to get his trader to shop around. And, most important, don't invest, in the first place, in a stock or a bond (or anything else) that involves a wide spread unless you truly understand the handicap this places on your chances and have reason to think it's a handicap worth accepting--as it sometimes is.

With the best of the thinly traded stocks that sport big spreads, it's really as if you're buying into a private company. The spread between what you could get if you did have to sell and what you'd have to pay if you insisted on buying out one of the partners can be very wide, indeed. Yet despite this illiquidity, this enormous spread, some private companies do, indeed, thrive and, eventually, make their shareholders very rich.

With the best of these thinly traded stocks, two things will happen. First, their prices will rise dramatically over the years as they grow; second, the spread will become progressively narrower as, having grown, their shares become more actively traded.

But your average guy doesn't invest in stocks such as National Superstars for the long term; he invests because he can buy 10,000 shares (gosh, that has a nice ring to it) for a mere $6250 (or sell them for $3750), and if the stock just hits ten in a year or two--is ten a big number? No, it is not--he's turned his $6250 into $100,000.

Lotsa luck, sucker.

the difference between the buying price and the selling price makes all the difference

*OK, here's how. The Treasury issues one billion dollars' worth of bonds that promise eight percent, let's say, for 30 years--that's 60 semi-annual interest payments of $40 each on every $1000 bond, plus a 61st payment: your original $1000 back when the bond is redeemed. Some big firm like Goldman Sachs buys the entire billion, let's say, and "strips them" into 61 separate pieces of merchandise, as a chop shop strips a stolen car. You want to buy just the 48th semiannual interest payment"? OK, you got it. Twenty-four years from now, when the Treasury pays it, it will be used by Goldman Sachs to pay off your bond. Until then, nothing. That particular piece of merchandise is called a 24-year zero-coupon bond. The Treasury may have thought of it as "just another goddamned $40,000,000 semi-annual interest payment we'll have to make on September 1, 2010--don't forget," but the clever folks at Goldman or Salomon or Merrill, in return for a nice spread, turned it into a $40,000,000 zero-coupon-bond issue that they sold to brokers such as yours or mine to sell--with another nice spread--to guys like you and me.

**Bonds are sold in $1000 increments but are quoted in cents on the dollar. A bond trading at par (face value) is quoted at 100, not 1000. So adding "an eighth" makes it 100.125--$1001.25 per bond. Of course, my bonds would not be up to par for another 21 years. They were quoted around 15--$150 a bond--so adding an eighth meant $151.25. Multiply that extra $1.25 by 250 bonds and you get $312.50.

***That's where the real money in real estate is. Residential parking spaces in Boston's Brimmer Street Garage on Beacon Hill, I'm told, have risen from their initial offering price of $7000 to more than $50,000 today.