Anyone invest in corporate bonds?

[jpg7n16]

Jaystone,

Bonds are usually always issued at $1000 par value. And they have a maurity date of 20XX. What that means is that in 20XX, you will receive $1000 no matter what you paid.

Usually you receive interest payments along the way (most pay interest every 6 months)

So a 5.8% WalMart Oct-2018 bond may be selling for say $935. Which means that you would pay $935 to purchase the bond from some other investor. And then you would get $29 every 6 months ($29*2= $58 = 5.8% of 1000), and in October of 2018, you would also get back $1000 - from WalMart.

If it we selling for $600, 800, 1000 or even 1100 (aka selling at a premium), in Oct you would still get back $1000.

[jIM_Ohio]

Steve= read JPG's post #16

Bonds are usually always issued at $1000 par value. And they have a maurity date of 20XX. What that means is that in 20XX, you will receive $1000 no matter what you paid.

If you are looking at bonds which mature in 5 years, are you buying at a premium or discount to par? and what is the coupon (interest rate)?

I would buy many individuals, and you have it right- individual bonds are less risk than bonds funds... when it comes to NAV and interest rates

in addtion, look at zero's (bonds which pay no interest and mature at par) if you need to avoid taxes now (these work well for education). I am told munis on secondary market sell fast...

[jIM_Ohio]

In answering a question on another thread, I suggested investing in corporate bonds, something that I personally have never done. As I look at the offerings, though, I'm thinking more about adding some bonds to our portfolio. Do any of you invest in individual corporate bonds? What has your experience been with them? Anything I should know to watch out for?

premium vs discount is issue 1
is bond callable (this is really important with rates this low)
par value for most bonds is 1000
so if 900 is cost, it is at a discount (higher yield), if 1200 is cost, it is at a premiun (lower yield)
if bond is callable, know the yield to call... and use that for comparison

(know coupon, yield to maturity, yield to call and current yield for all bonds under consideration)
if you buy a muni at a discount, there are TAXABLE implications (not all munis will be tax free...)

[disneysteve]

what is the coupon (interest rate)?

(know coupon, yield to maturity, yield to call and current yield for all bonds under consideration)

Just to make sure I know the correct meaning of all of those terms:

Coupon rate is the interest rate at the time the bond was initially sold.

Yield to maturity is the yield you will actually earn if you buy the bond today at its current price (premium or discount).

Yield to call is the yield you will actually earn if you buy the bond today at its current price and it is called (redeemed) prior to maturity at a designated callable date.

Am I correct on all of those definitions?

[Scanner]

You may want to consider utility stocks as an alternative to bonds.

1. Usually pay a dividend per quarter for steady income.
2. Utilities are usually stable and always needed.
3. Grandpa used to own them for income.
4. Regulation/deregulation by gov't is usually strongest risk.

[disneysteve]

Ultimately, does it matter if you are buying at a premium or a discount if you are happy with the yield to maturity?

[jIM_Ohio]

Just to make sure I know the correct meaning of all of those terms:

Coupon rate is the interest rate at the time the bond was initially sold.

Yield to maturity is the yield you will actually earn if you buy the bond today at its current price (premium or discount).

Yield to call is the yield you will actually earn if you buy the bond today at its current price and it is called (redeemed) prior to maturity at a designated callable date.

Am I correct on all of those definitions?

I don't have my series 7 "chart" with me, you are close

If bond is at a premium (higher than par), yield to maturity is higher than yield to call, both are less than the coupon
If bond is at a discount, yield to call is higher than yield to maturity, both are higher than the coupon
usually bonds are quoted yield to worst... so if yield to call is lower that is what is yield to maturity, then that is what is used... but that should be double checked... the difference could be .2% or 20%, depending on how soon bond is called and the value of the bond.

If you are happy with interest payments and risk for interest received, you are correct that those numbers above don't matter... those numbers are best used to compare an enron bond trading at a discount to a microsoft bond trading at a premium (for example).

[disneysteve]

If you are happy with interest payments and risk for interest received, you are correct that those numbers above don't matter.

Thanks, Jim. That's what I thought. So if the WalMart bond, for example, has a yield to maturity of 5.8% and is non-callable with a maturity date in 2017, that means if I buy the bond today at whatever the current price is, I'll earn 5.8% for the next 7 years (assuming no default). If I'm comparing that to parking money that I won't need anytime soon in CDs earning 1 or 2%, that's a pretty sweet deal. For someone like my 80-year-old mother who depends, in part, on interest income, it might be worth looking into putting some of her money into a few high quality corporate bonds rather than low-paying CDs with the understanding that they do have a level of risk beyond that of FDIC-insured vehicles.

Does anyone know what the transaction cost is when buying bonds from Scottrade? Is there a commission or is that somehow priced into the offering price?

[jpg7n16]

Just to make sure I know the correct meaning of all of those terms:

Coupon rate is the interest rate at the time the bond was initially sold.

Technically, it is the amount of interest paid each year based on a $1000 par value.

A 5.8% coupon rate will pay $58/year (usually $29 every 6 months) until it matures.
8.5% coupon = $85/year
7% coupon = $70/year

But this amount does not compound, or grow, or change. It'll pay $58 every year.

I mention this because a 5.8% CD (if it existed in the market) would compound each year. $1000 would become $1058, which would become $1119.36, etc.

Yield to maturity is the yield you will actually earn if you buy the bond today at its current price (premium or discount).

...and hold until maturity, and invest the interest payments at the same rate.

Yield to call is the yield you will actually earn if you buy the bond today at its current price and it is called (redeemed) prior to maturity at a designated callable date.

...and hold until called, and have invested the interest payments at the same interest rate along the way. Yield to call should also factor in if there is any premium paid to call the bonds.

ex - some bonds may only call by paying say $1100 per $1000 of par value. That increases your rate of return.

Am I correct on all of those definitions?

With some minor corrections, yes. In a basic general sense, yes your definitions were spot on.


The calculations in the financial calculators always assume that the interest payments are reinvested at the interest rate entered. If they aren't the rate goes down. Just something to watch out for.

-------------------------
Here's an example:

Wal-Mart 2017 5.8% coupon selling at par (bought beginning of 2011)
Cashflow out: -1000
Cashflows in: 58 + 58 + 58 + 58 + 58 + 58 + 1058 = 1406

For an investment today that costs $1000, and returns $1406 at the end of 7 years, is an IRR of 4.988% - which you'll note is different than what you expected of 5.8%.

Now why is that??? It's because those $58 interest payments need to be reinvested at 5.8%, to acheive the full 5.8% Yield to Maturity.

[kork13]

Does anyone know what the transaction cost is when buying bonds from Scottrade? Is there a commission or is that somehow priced into the offering price?

I don't use Scottrade, but with USAA and Charles Schwab, there is a flat fee, above and beyond the price of the bond. The fee is higher than regular trades, but it's not unreasonable.

If it can be any reference for a comparison, USAA is $25 + $3/bond, Schwab is $1/bond (min $10) for online trades, or $25 + $1/bond (min $35 total) for broker trades.

[jpg7n16]

Thanks, Jim. That's what I thought. So if the WalMart bond, for example, has a yield to maturity of 5.8% and is non-callable with a maturity date in 2017, that means if I buy the bond today at whatever the current price is, I'll earn 5.8% for the next 7 years (assuming no default). If I'm comparing that to parking money that I won't need anytime soon in CDs earning 1 or 2%, that's a pretty sweet deal. For someone like my 80-year-old mother who depends, in part, on interest income, it might be worth looking into putting some of her money into a few high quality corporate bonds rather than low-paying CDs with the understanding that they do have a level of risk beyond that of FDIC-insured vehicles.

As long as you can reinvest the interest payments yes. But even still, it'd come out better than a 2% CD.

And for what it's worth, I think the FDIC has a higher chance of going broke than WalMart.

Does anyone know what the transaction cost is when buying bonds from Scottrade? Is there a commission or is that somehow priced into the offering price?

Sorry, this is why I didn't reply earlier - I don't actually trade bonds. I know how they work, but never trade them.

I always look at bond funds because they are able to automatically reinvest any interest payments for me, usually. I set up fidelity to automatically reinvest any interest/dividends from my funds. No fees, easy to manage. Works for me.

It's very hard to reinvest only $58 in the buying bond world - as you'd have to wait until you have another $1000 saved up. It's easy in the bond fund world - just buy 4 more shares.

[jIM_Ohio]

individual bonds are said to have interest rate risk- not just because changing interest rates change the value of the bond itself, but also because (as JPG pointed out), that the interest payments need to be reinvested, and the investor has no control over the rate those interest payments are reinvested at.

Thanks, Jim. That's what I thought. So if the WalMart bond, for example, has a yield to maturity of 5.8% and is non-callable with a maturity date in 2017, that means if I buy the bond today at whatever the current price is, I'll earn 5.8% for the next 7 years (assuming no default). If I'm comparing that to parking money that I won't need anytime soon in CDs earning 1 or 2%, that's a pretty sweet deal. For someone like my 80-year-old mother who depends, in part, on interest income, it might be worth looking into putting some of her money into a few high quality corporate bonds rather than low-paying CDs with the understanding that they do have a level of risk beyond that of FDIC-insured vehicles.

Does anyone know what the transaction cost is when buying bonds from Scottrade? Is there a commission or is that somehow priced into the offering price?

bonds are PRICED by yield to maturity or yield to call. Bonds PAY the coupon.

JPG went over this, but more info:

a 5.8% coupon is 5.8% of a par value of 1000 (most bonds are issued at par) which means 5.8% of $1000=$58. Bond will pay $29 semi annually, for an annual interest payment of $58.

If the bond is now trading at 120 (or 1200)- depending on what you read it might be 120% of par value or a price of 1200, the new yield is $58/1200=4.83% yield. The 120 and 1200 are synonmous, just check vocabulary.

If that same bond trades at a discount of 800 (or 80) that means interest is $58 paid annually on a price of 800 for a yield of 7.25%.

So going back to terms-

coupon- fixed (nominal) interest rate which determines the interest payment of the bond, this is FIXED until maturity. Stated as a percent. 5.8% coupon and 5.8% yield are NOT the same thing (unless bond is at par).

Par value of a bond- par is always $1000. Most bonds are sold at par, but some exceptions are zeros (bonds issued at a discount which mature at par, the gain is implied interest). Some bonds are issued at a mild discount to make them yield higher. Negotiated munis are an example of a bond which might be issued at a mild discount (serial issue).

Yield- the current interest rate (if you will) you receive based on the value of the bond (this changes on secondary market) and coupon (this does not change once issued).

Bonds are priced by YIELD. Yield changes more often than some of us change underwear.

If you compare a 10% coupon trading at 1500 maturing in 2020 to a 7% coupon trading at 1400 maturing in 2015 to a 5.8% coupon trading at 1100 maturing in 2012, the forumula is all the same.

Calculate the interest payment

10% coupon=$100
7%=$70
5.8%=$58

divide that payment by bond value to calculate yield

$100/1500=6.67% yield
70/1400=5% yield
$58/1100=5.2% yield

the higher coupon does not guarantee highest yield...
make sense?

[jIM_Ohio]

Bonds are priced by YIELD. Yield changes more often than some of us change underwear.

If you compare a 10% coupon trading at 1500 maturing in 2020 to a 7% coupon trading at 1400 maturing in 2015 to a 5.8% coupon trading at 1100 maturing in 2012, the forumula is all the same.

Calculate the interest payment

10% coupon=$100
7%=$70
5.8%=$58

divide that payment by bond value to calculate yield

$100/1500=6.67% yield
70/1400=5% yield
$58/1100=5.2% yield

the higher coupon does not guarantee highest yield...
make sense?

a few more things

If you see a 6% coupon on two bonds, with one priced at 1200 and one priced at 1250, the higher priced bond (the 1250) is probably rated higher. Would you rather have walmart bond, or a bond from Joe's pizza? Higher quality means higher price if the coupon is the same.

Longer maturities have more risk than shorter maturities. If rates go up, the price of bonds goes down... the longer the term (maturity), the more the price fluctuation. For example if you see two AAA rated bonds, and one matures in 2020 and another matures in 2030, expect the price of the 2030 bond to drop more than the 2020 bond (assuming coupon and rating are equal).

[disneysteve]

JPG and Jim, thanks for all of the input. I had a pretty good understanding of the bond market but you both filled in a few details and nuances. The one big thing I learned is that the YTM is based on reinvesting the interest payments at the same rate, which is a farce since that it difficult or impossible to do. Still, as JPG said, a 5.8% bond yield is going to beat a 2% CD no matter what. Besides, if you are investing for current income, the CD wouldn't compound if you were drawing out the interest each month anyway.

I'm going to read up on the buying process at Scottrade and see what the fees and minimums are. I'll report back on that for general info.

[jIM_Ohio]

JPG and Jim, thanks for all of the input. I had a pretty good understanding of the bond market but you both filled in a few details and nuances. The one big thing I learned is that the YTM is based on reinvesting the interest payments at the same rate, which is a farce since that it difficult or impossible to do. Still, as JPG said, a 5.8% bond yield is going to beat a 2% CD no matter what. Besides, if you are investing for current income, the CD wouldn't compound if you were drawing out the interest each month anyway.

I'm going to read up on the buying process at Scottrade and see what the fees and minimums are. I'll report back on that for general info.

bonds trade with accrued interest, so when you buy a $1000 par value bond and have to pay $1002 to get the $1000 bond, don't be surprised (you might have to pay accrued interest). Might=WILL unless you know something I don't.