Hello all,
Where do you folks recommend I go if I wish to learn about bonds? Both
corporate and municipal... specifically what is the difference between
coupon and yield? also how does the price get determined? Any resources or
words of wisdom of your own, would be greatly appreciated.
Thanks!
Shhhh
In article <>
wrote:
> Where do you folks recommend I go if I wish to learn about bonds? Both
> corporate and municipal... specifically what is the difference between
> coupon and yield? also how does the price get determined?
Do you learn by reading, or do you learn by doing? If you learn
by reading, any of the more advanced personal finance books are
going to cover the subject. If you learn better by doing, head
down to your broker's office, and pick up a few bonds and put a
little in a bond fund or two.
-john-
--
============================================================ ==========
John A. Weeks III 952-432-2708
Newave Communications
============================================================ ==========
About pricing:
Generally speaking, secondary bonds (= older bonds that have
not yet matured) have prices that can change throughout the
trading day. Pricing is a function of new issue bond yields,
which is a function of current interest rates, which is
generally driven by Federal Reserve Board decisions. When
the Fed raises "its" interest rates, this tends to affect
the whole lending market, certainly including bonds. If a
person can get a new bond for 10% while an old bond a moment
ago was yielding 5%, which would you buy? The new bond. So
bond buyers adjust their buying price for the old bond,
lowering that price until it yields about 5%. Maturity and
call options will influence this process as well.
Some resources:
Google for {"investing in bonds"}. Quite a few consumer
oriented sites come up.
. See especially the links
on the right side of the home page.
Investing vocabulary:
is very helpful for
looking up things like "coupon" etc.
A few reflections of my own after about 15-years of
investing in bond mutual funds (investment grade,
international, and junk) and individual bonds that are
municipal, federal, and corporate:
Bond mutual funds greatly reduce risk, which is particularly
important for junk bonds and international bonds (emerging
market or otherwise). I will only buy junk bonds within a
mutual fund. One disadvantage is that bond yields in many,
high grade bond funds are so small that the expense ratio
takes a big bite.
High grade individual corporate bonds are more cheaply and
easily traded than ever before. Perhaps this is due to the
internet, or maybe the crash of c. 2000 has driven a higher
demand for bonds as people realize the importance of
diversifying their portfolios, or a combination. The one
drawback to working with individual bonds is one has to have
a lot of money to have a diverse, and so lower risk,
collection.
I have read posts at another newsgroup where many pillory
bonds. Be very skeptical of this. Keep reading authoritative
studies of how holding bonds affects one's overall portfolio
yields. High grade bonds (corporate, federal, or municipal),
generally speaking tend to smooth the rough spots in
performance and in fact historically speaking have resulted
in a higher yield over many periods compared to holding
stocks alone.
Don't forget about "yield to call".
I just learned a lesson this week: It sucks to have your bond called
just a few month after you purchased it. At least it wasn't a very
expensive lesson this time.
Best regards,
Bob
"Elle" <> wrote
> If a person can get a new bond for 10% while an old bond a
> moment ago was yielding 5%, which would you buy? The new
> bond. So bond buyers adjust their buying price for the old
> bond, lowering that price until it yields about 5%.
Post-o. That last number should be 10%.
Thank you all for your help,
I've been doing some reading at some of the sites you folks suggested... now
I have another question, if you don't mind...
CUSIP: 123
ISSUER: XYZ
Settle Date: 3/15/2006
Maturity Date: 4/1/2012
Coupon: 6.375%
Yield: 4.913%
Price: 107.563
Now I'm smart enough (I think) to know... If I wanted to buy a single (1)
bond it would cost me $1075.63. (I realize most bonds are sold in lots of 5
this is just for illustration).
How do I fugure out how much interest I will generate when the bond is
cashed in in 2012? do I use:
6.375% *1075.63 = $68.57 over the life of the bond? Or
4.913%*1075.63 = $52.85 over life of bond?
As you can see I have a partial grasp, just trying to learn the rest...
Thanks in advance, this group is invaluable!
Shhhh
"Shhhh" <> wrote in message
news:
> Hello all,
>
> Where do you folks recommend I go if I wish to learn about bonds? Both
> corporate and municipal... specifically what is the difference between
> coupon and yield? also how does the price get determined? Any resources
> or words of wisdom of your own, would be greatly appreciated.
>
>
> Thanks!
> Shhhh
"Shhhh" <> writes:
> CUSIP: 123
> ISSUER: XYZ
> Settle Date: 3/15/2006
> Maturity Date: 4/1/2012
> Coupon: 6.375%
> Yield: 4.913%
> Price: 107.563
>
> Now I'm smart enough (I think) to know... If I wanted to buy a single (1)
> bond it would cost me $1075.63. (I realize most bonds are sold in lots of 5
> this is just for illustration).
>
> How do I fugure out how much interest I will generate when the bond is
> cashed in in 2012? do I use:
>
> 6.375% *1075.63 = $68.57 over the life of the bond? Or
> 4.913%*1075.63 = $52.85 over life of bond?
Neither.
The bond will pay you $31.875 twice a year. Coupon is
a percentage of face value, not of what's paid for the
bond.
Let's pretend you buy $10,000 of face value (i.e. $10,756.30). You'll
get $318.75 twice a year. To further simplify (so there are no
accrued interest issues, I'm going to assume the coupon dates
are 3/15 and 9/15.
2006: $637.50 in interest
2007: $637.50 in interest
2008: $637.50 in interest
2009: $637.50 in interest
2010: $637.50 in interest
2011: $637.50 in interest
2012: $318.75 in interest
---------------------
Total: $4143.75 in interest
However, the bonds are redeemed for their face value, which is
$10,000. So you lose $756.30 at redemption, leaving you with a net of
$3387.45. So you started with $10,756.30 and ended with $14,143.75.
That works out to an approximate total rate of return of 4.67% per
year (the yield to maturity calculation assumes interest payments are
reinvested to yield the stated YTM, which is generally impossible for
small investors, and is totally inapplicable to people who are going
to consume the income. If you assume no reinvestment of the coupons,
the experienced YTM will be lower than the quoted YTM.)
--
Rich Carreiro
Shhhh,
-- Bonds do often pay monthly.
-- Maybe your broker will only sell in lots of five, but I
don't think that's the rule. Fidelity, for one, is
different.
-- Are you aware one can get CDs now yielding 5% or more and
maturing in just two or three years? See bankrate.com 's CD
rate links. CDs are lower risk (assuming FDIC insured).
Money market accounts at places like emigrantdirect.com are
similarly paying a very high yield. I wouldn't go out more
than two or three years now for a fixed rate bond or CD.
Also, I would strongly consider laddering at six-month
intervals. The current treasury yield curve appears to be
slightly less inverted than a month ago. See the graph at
the home page of .
Normally, it's not inverted. I expect interest rates for
four-years and longer to continue to rise but be very close
to two-three year rates for awhile.
--A short term bond fund is also an option at this point,
AFAIC. Fidelity's FSHBX (an investment grade, short-term
bond fund) is yielding 4.56% right now (see fidelity.com's
quotes engine). See also the short-term bond funds at
vanguard.com, which are even more competitive.
--In particular, if you don't have a lot of money and so
can't afford a diverse portfolio of individual corporate
bonds without taking on a lot of risk, consider a ladder of
CDs or a short (or even ultra-short) term bond fund.
Good luck.
Rich Carreiro wrote:
> To further simplify (so there are no
> accrued interest issues, I'm going to assume the coupon dates
> are 3/15 and 9/15.
> 2006: $637.50 in interest
I think you only get $318.75 in 2006 since you don't get paid interest
on 3/15/2006.
> So you started with $10,756.30 and ended with $14,143.75.
> That works out to an approximate total rate of return of 4.67% per year
So that means you only get $3825 in interest, which means you invested
$10,756.30 and end up with $13825. Which is an approx annualized rate
of return of 4.27%, if you do not invest interest payments whatsoever.
> the yield to maturity calculation assumes interest payments are
> reinvested to yield the stated YTM, which is generally impossible for
> small investors
Disagree here. You may not be able to invest the interest payments at
the same 4.91% yield, but the small investor can easily put in money
market and/or treasury bills for between 4.25% to 4.75%. If you do so,
you will still experience an effective yield pretty close to 4.91%
(perhaps 4.8%). Certainly far higher than the 4.27% above. It is very
unrealistic to have the interest payments just sit there for 6 years.
> and is totally inapplicable to people who are going
> to consume the income.
Even for people who are going to consume the income, they should not
measure by the 4.27% rate. If you consume the income, you have to
remove it from the equation. The way to do that is to calculate the
internal rate of return. I plugged in the cash flows into Excel and
used the XIRR function. The resulting internal rate of return? 4.91%
> If you assume no reinvestment of the coupons,
> the experienced YTM will be lower than the quoted YTM.
True, but I think this is the wrong approach to look at it. If you want
to fairly compare the total return of bonds to other vehicles, you
should still look at the YTM.
An additional question about bonds can someone invest in municipal bonds
from a state other than the one they live in and still recieve the tax
benefits? or do they need to be from your home state?
BB123
"Shhhh" <> wrote in message
news:
> Hello all,
>
> Where do you folks recommend I go if I wish to learn about bonds? Both
> corporate and municipal... specifically what is the difference between
> coupon and yield? also how does the price get determined? Any resources
> or words of wisdom of your own, would be greatly appreciated.
>
>
> Thanks!
> Shhhh
Cogent as ever, Elle wrote:
> Bond mutual funds greatly reduce risk . . .
For the fixed income novice I think bond funds are the best bet. I like
the bond funds that track the total U.S. bond market. All the big
companies offer them. You get professional management, excellent
diversification and low fees.
> The drawback to individual bonds is one has to have
> a lot of money to have a diverse, and so lower risk,
> collection.
Another reason I like bond funds for all but the most sophisticated and
diligent investor.
> I have read posts at another newsgroup where many pillory
> bonds. Be very skeptical of this.
Another excellent point from Elle. Even the youngest and most
risk-tolerant investor should have *some* fixed income in his portfolio.
Doesn't have to be much, and it doesn't have to be fancy. Say 20 percent
in a total bond market index fund.
Yahoo Finance has some very good reading and it's free. Also, I would
recommend doing your bond buying with an online broker if you don't
want to pay higher transaction fees. Schwab, Vanguard and many more
have excellent bond sites.
"Paul Michael Brown" <> wrote
> For the fixed income novice I think bond funds are the
> best bet. I like
> the bond funds that track the total U.S. bond market.
I am still a little concerned about rising interest rates
lowering the prinicipal value of one's investment in
intermediate to long term bond funds. But that could be hair
splitting at this point. Media reports say the Federal
Reserve Board is (understandably, AFAIC) cooling its jets.
I can stomach an intermediate term fund a lot better if one
intends to hold it for the long term. NAV may decline around
10%, worst case? But who really cares 20 years from now,
since the yield will pay that back and then some, etc.? I'm
just messing with the charts at finance.yahoo and Vanguard
and some intermediate term, high grade funds, unfortunately
going back only about 15 years.
Vanguard's total bond market index fund (VBMFX) and seems to
offer serious competition to any other total bond market
index fund.
Good words on this subject from you as well...
"Bucky" <> writes:
> True, but I think this is the wrong approach to look at it. If you want
> to fairly compare the total return of bonds to other vehicles, you
> should still look at the YTM.
I agree with that and never said otherwise. I only said that someone
who consumes the interest is going to have a personal RoR that is
less than the YTM.
--
Rich Carreiro
> Can someone invest in municipal bonds
> from a state other than the one they live in and still recieve the tax
> benefits? Or do they need to be from your home state?
The general rule is that munibond interest is always exempt from federal
taxation, and exempt from taxation in the state of issuance. If you're
willing to pay the state income tax you can buy bonds from any state you
like.
But there are exceptions. For example, some "private activity bond"
interest is subject to the AMT. And in the District of Columbia, munibond
interest is exempt from state tax regardless of the state of issuance.
Ditto for Alaska. There may also be capital gains or losses that affect
your taxes.
For more than you ever wanted to know about the tax aspects of munibond
investing, see:
Good site for other bond related stuff, by the way. Although skewed toward
investors who buy individual bonds.
Paul Michael Brown wrote:
> Even the youngest and most
> risk-tolerant investor should have *some* fixed income in his portfolio.
> Doesn't have to be much, and it doesn't have to be fancy. Say 20 percent
> in a total bond market index fund.
Do most people think this is true? The whole point of adding bonds is
to reduce volatility, but if you look at efficient frontier curves,
adding bonds also reduces long-term returns. If your hypothetical young
investor is truely highly risk tolerant, why have bonds (that investor
would not seem to be interested in reducing volatility, and would be
interested in maximizing return)? Even if one can make a successful
argument for bonds in this case, 20% seems really high, doesn't it?
-Will