Wendy,
You had recently mentioned you were already buying/ looking to buy longer durations bonds.
Would you be able to share a recent example and how you did it?
I was trying to see the rates quoted on Fidelity but I dont see the huge 7 to 8% yields that the CNBC guys keep talking about…In fact, I dont even see anything close to 5% on the higher rated bonds.
If possible, it would be great if you can share an example of how you did it, and the rates you got
Thanks,
Charlie
In Fidelity fixed income, The highest yields were for the B rated bonds. So, just went to see them. I see this, and had a few queries:
I am not sure why Goldman sach;s this bond is B rated…I know nothing is certain, but I do strongly believe that GS would be able to pay my interest and my principal…So, any idea why they would be graded as B ( well, I do see Wells fargo, citi etc…and I guess that may be they are all downgraded because of the recent bank issues)
I am guessing the coupon rate is the annual amount I will be paid?
So, lets say I buy 10k of this bond below…I guess I would be paying close to $ 9858
With a coupon rate of 6%, I get paid 6% ($ 600) every year for 5 years?
and at the end of the term, I get my full amount of $10K back
So, that would give me about $3000 (from my coupons) and $142 from my principal…giving me a grand total income of $3142
Have I understood this right?
thanks a lot,
Charlie
@Inspired2learn, the yields on bonds are related to the certainty that they will pay the coupon.
The super-high yields are callable bonds. If prevailing interest rates fall, the issuer of the bond has the option of calling the bond, which leaves you with cash in your hand but only lower interest rates to re-invest in.
Fidelity has screens to show only non-callable bonds (or CDs). I hate it when a bond is called so I only invest in non-callable bonds even though their yield is lower.
Moody’s and S&P rank bonds according to their likelihood of defaulting. A company may issue many specific bonds with different levels of seniority. Bonds that are more senior and are first in line to be repaid will have a higher rating than junior obligations that may default. Believe the ratings, not your emotional judgment of how strong a company is. The rating is assigned after accountants scrutinize the books.
Even relatively highly-rated bonds may default in a crisis. I bought a Lehman Bros. bond which was A rated. I sold it in early 2008 at a loss when I read that Lehman was leveraged 97%. It’s a good thing I did because Lehman went bankrupt in the 2008 financial crisis.
Currently, the yield curve is inverted. Longer-term CDs and bonds yield less than shorter-term.
I often download Fidelity’s list of new-issue FDIC insured CDs into a spreadsheet. These are highest safety, along with Treasuries, TIPS and Agency bonds. I sort and discard all the callable ones. I then plot the non-callable CDs on an XY chart. Occasionally there are outliers, higher yielding CDs from obscure banks. That’s how I find them.
I avoid highly speculative corporate bonds (e.g. B rated). Spreads have been dropping as the market gradually gains confidence in a soft landing. But I think this is premature.
Wendy
My broker’s bond desk doesn’t currently show that particular bond as available. It’s after hours on a weekend, though, so that doesn’t surprise me.
That said, assuming the company does not default, you would get the coupon payment, which is $60 per bond, every year until it either matures or gets called. At maturity or when called, you’d also then get the face value of the bond back (typically $1,000) – again, assuming the company does not default. What I can’t tell is how frequently the bond pays its coupon – for example, it could be $60 once per year, $30 twice per year, or $15 four times per year. The prospectus or the deeper-dive link from your broker should be able to tell you.
The screen capture you had shows a “next call date” of 06/20/2024, which means that Goldman Sachs could potentially buy back the bond as early as that date. Typical call provisions have the bond bought back at face value plus any accrued interest to that point. Occasionally, there will also be some sort of “make whole” provision that partially compensates for any coupon payments that won’t be received due to that early call. You would have to dig into the details on that specific bond to figure out what its call provisions look like.
As for the amount you’d pay to set up the position, that screen capture shows a bid price of $97.071 and an ask price of $100.400 . Assuming steady pricing, odds are you’d pay somewhere between the two – or between $970.71 and $1,004.00 per bond, plus any commission you’d be paying to buy the bonds. On top of that, you would also pay any accrued interest due to the seller of the bond. For example, if the bond pays $15 a quarter, and you’re a month into that quarter, you’d pay the seller $5 of the interest that you’d expect to get two months later.
My experience is that when dealing with “retail” quantities of bonds, I tend to pay closer to the ask to buy, even when limit orders are accepted for consideration by the bond dealer.
Regards,
-Chuck
Home Fool
Thanks so much Wendy and Chuck!
Quick addition to this thread; when you are looking at callable bonds, be sure to determine the Yield to Worst (which will include that call risk). I’ve not purchased a bond in a long time but I would hope any decent bond screen will automatically calculate that for you.
