Dear Mr. Berko:

I have a portfolio of 17 junk bonds, most of which you recommended over the past year. But I’ve discovered that I may be paying commissions as high as 12 percent. I recently bought $15,000 face value of Northwest Airlines 10 percent bonds that come due in 2009 and I paid $744 a bond, which I discovered when I got my monthly statement. Those bonds are listed on my statement with a market value of $670, not $744, which I paid just three days before.

My broker told me that prices for small bond purchases are very volatile, that odd-lot bonds cost more than round-lot bonds – with $1 million considered a round lot — and that there is a very small market for these types of bonds. He said his brokerage firm’s traders may have to spend a lot of time to find the bond and that often they will have to buy a $1 million piece just to fill my order for $15,000 in bonds, then hold that position for a week until they sell the remaining $985,000, and they can lose money.

He said that the commission costs in my bond purchases are included in the price and there’s no way he can “exactly tell” what the dollar amount is. Can you give me a clue here on what’s going on?

J.G., Jonesboro, Ark.

Dear J.G.:

Wow, you really got soaked by that broker. That loquacious lad is as skilled a liar as Sinon, the Greek fabulist who convinced the Trojans that the wooden horse was a benign parting gift.

Every salesman knows what he’s going to make when you buy something from him. I could have bought those Northwest bonds all day at $660 to $670 per $1,000 face value, which was the market price at the time you wrote me. So if your broker paid $670 for the bonds and charged you $744 per $1,000, he was adding a $74 per bond markup in price, which is 11 percent. That’s turnpike robbery! So it’s not unreasonable to assume that he and his firm might have taken similar liberties with other bonds in your portfolio.

In September, the National Association of Securities Dealers discovered that some bond investors were being soaked by their brokers for fees as high as 30 percent. In the process, the NASD fined four huge national brokerage firms a piddling $5 million each. The NASD Rules on Fair Pricing recommend that the markup on bonds be limited to 5 percent of the selling price. So if a corporate or municipal bond is trading at $670 a bond the brokerage should not mark up the price by more than $33.50 per bond ($670 times 5 percent). That means the bond would cost you $703.50 and that’s still an overly huge markup.

In most cases, the markup should be no more than $10 a bond, and on those 15 Northwest bonds the commission costs would have been $150, not the egregious $1,110 commission you paid.

Substantial markups in the bond business may be the rule rather than the exception for small buyers and inexperienced investors. The reasons are simple:

1. The commission costs are hidden in your purchase price and do not appear on your confirmation as they do when you buy 200 shares of common stock.

2. Most bond prices are not listed in the paper (as stock prices are) and the buyer must trust his broker’s word that the price and commission are fair.

3. Bond pricing is subjective and bonds do not trade in an orderly bid/ask market like common stock.

If you are going to be a bond buyer, there are easy ways to be sure you are buying or selling at a fair price. Here’s what I often advise folks to do.

If your broker shows you 10 bonds for your portfolio, tell him you can’t give him an answer until tomorrow. Then call two other brokers and ask them what it would cost to buy those same 10 bonds. In many instances, you may find that the differences between your broker’s price and the others’ can vary quite a bit. Do the same when you want to sell bonds.

There are two Web sites to help you get a fair deal: www.nasdbondinfo.com and the Bond Market Association’s Web site, www.investinginbonds.com.

Finally, I suggest you show this column to your broker’s office manager. Ask him to check the real market price of the bonds in your portfolio on the day you made the purchases. If he’s a good guy, he will want the answer as much as you do.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.