# Is it time to load up on bonds?

If you buy that bond today, the cash flows are roughly:

``````1/5/23 -1015.883 (price of bond at 101.5883)
1/5/23 -6.33 (interest accrued to current owner of bond)
2/28/23 15.825 (3 months interest at 6.33%, since it is a floating rate note, this can change)
5/29/23 15.825 (3 months interest at 6.33%, since it is a floating rate note, this can change)
8/29/23 15.825 (3 months interest at 6.33%, since it is a floating rate note, this can change)
11/29/23 15.825 (3 months interest at 6.33%, since it is a floating rate note, this can change)
11/29/23 1000 (return of principal)
``````

The total yield they calculate is 4.862%, that includes all cash flows, interest payments and the capital loss between the buy price and the sell price.

The prospectus supplement (there is also a master prospectus for this entire series of bonds) can be found here, where all the details about this bond can be found.
https://www.sec.gov/Archives/edgar/data/886982/000119312513456713/d636801d424b2.htm

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Thank you so much.

I guess I completely misunderstood then. So, your calculation equals what the yield rate said on the screener (2nd to last column)…However, I thought we might also get extra money from the coupon rate? So, apart from the yield, don’t we get that 6.33% additional money as the coupon rate?

I did enter all these cash flows into an excel spreadsheet, but the XIRR function failed to produce a result. That happens sometimes and I know not why.

No. You are buying a \$1000 bond for \$1015.883, the yield COMES FROM the interest payments on that bond!

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Charlie,

GS’s 6.33% of '23 is NOT a top-tier, AAA-rated bond. It is a mid-tier, BBB+/A2 bond, whose YTW/YTM (look the terms) is a measly 4.86%, or a yield comparable to a 26-week Treasury bill, with this caveat. If you live in a state that imposes income taxes, then the bill will give you a higher net-yield.

You’re willing to learn. You’re anxious to learn. So you need to hit the books rather than hang out in investing forums, hoping to find direction. The very best introductory book on bonds is that by Sharon Saltsgiver Wright. Your local library won’t have a copy. But used copies of the first or second editions (either is fine) can by bought from the usual book sellers. Work your way through the book, pencil in handle and a calculator nearby. Once you understand the lingo and the tiny bit of basic math involved with pricing bonds, then go back to your screener with this thought in mind.

Bond shopping is nothing but comparison shopping, and it involves trying to answer this question: How much reward am I being offered for how much risk? Or, to put it even more simply:

#1 If I lend this issuer my money, is it likely to make interest payments and to return principal?
#2 If/when I do get my money back, by how much will my purchasing-power have declined due to taxes and inflation?"

Yeah, one could get fancy and worry about things like ‘convexity’ and 'duration" (and a dozen other things the bond pros need to track and manage). But at the retail level, there are only two risks that need to be worried about: ‘Default risk’ and ‘inflation risk’, because everything else will sort itself quite nicely once you’re carrying a portfolio of a couple hundred positions, which is really what it takes to obtain that elusive goal of ‘proper diversification’.

That means, if you’re serious about bonds, you’re buying treasuries, agencies, munis, corporates, foreign sovereigns, and you’re buying across the yield-curve and up and down the credit-spectrum. For sure, there are plenty of excellent mutual funds or ETFs that will do that work for you. But all except target-maturity funds come with “market risk” (another term you need to learn), whereas owning the underlying directly allows you to bypass that risk

My suggestion? If it’s ‘income’ you’re looking for, and if you know how to do credit analysis, then look at preferreds or at the ETFs or stocks that pay fat monthly divs. There are better, safer opportunities there than in the current bond market(s). (IMHO, 'natch.)

But also do this. Whether it’s individual bonds that you buy, or bond funds, or pfds or ETFs, buy widely and buy small. We’re in the middle of a very crazy market that is more likely than not to blow up. So what you should be doing at this point is trying to gain experience, instead of putting a lot of money to work. That means carrying a lot of cash (which can be parked in T-bills, though you should avoid CDs which are paying crap these days. )

Arindam

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Anyone know why XIRR() is failing here?

Use this formula instead: =yield(settlement, maturity, rate, price, redemption, freq, [basis])

E.g., on 03/30/20, I bought AK Steel’s 7’s of '27 (due 03/15/27) at 68.400 (plus a buck a bond commish) for a YTM of 14.3% (using a 365-day basis).

However, that formula says nothing about the impact of taxes and inflation on achieved returns. But it’s easy to write the needed code. Assume 5% inflation. A 25% tax rate on ordinary income. A 15% tax rate on cap gains, and the projected ‘real rate of return’ on that bond drops to 5.1%, which isn’t bad for a nearby, spec-grade issue that’s currently trading near par. (below)

Why build such a formula and run such exercises? Because, once the spreadsheet is built, it’s easy to dump the output of bond scan into the spreadsheet --say 500 bonds-- and to bubble sort the real returns so that you’re only looking at the bonds offering the most return, the soonest, all other things being equal, such as agency-assigned or market-implied credit rating. Then, on just the three or four that might be worth looking at further, you run traditional credit-analysis (if a corporate bond), just as you would when buying a stock, because it’s the same underlying issuer with this diff. Bonds nature; stocks don’t.

As I’ve said before on other occasions, bond investing is nothing other than Ben Graham-style value investing in which ‘value’ has to be computed relative to ‘risk’. And what almost no one understands is that on a risk-adjusted basis, bonds offer the same money as equities, or else the arbs step in to make it so. But even on an absolute-returns basis, the money offered by bonds can be fabulous. Not these days. But not so long ago, 15% to 20% (or more) was sometimes available from spec-grade issues.

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Thanks Arindam and Mark. I realize now that individual bond buying can also be quite complex. I am slowly selling some of my stocks, and buying T-bills. I was contemplating buying bonds but the media folks kept saying 7 to 8% yield investment grade bonds…and no matter where I search, I wasn’t able to see that…May be it is best to just buy the Money market funds and T-bills , and continue learning.

Thanks again for all the helpful suggestions.

Charlie

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Charlie,

The bond game --like the stock game-- can be as complex as you want to make it. But it doesn’t need to be so. In fact, investing in bonds is a whole lot simpler than investing in stocks, for three reasons: bonds mature; they are rated, the holding periods are typically long.

What “proper” bond investing does require is an obscene amount of capital to manage its risks. That’s why newbies and small accounts flock to stocks. With just a \$100 bucks, you can have a good time --and turn a profit-- in stocks. But with bonds, something closer to at least \$100k is needed, and \$250k would be better.

However, here’s the workaround. When people talk ‘diversification’, they always assume ‘synchronicity’. In other words, they mandate that X number of positions has to be held to dampen security-specific risk. E.g., a common figure for stocks is 20-25 positions across various industries/sectors. But what if one has just a tiny account, but one has a commitment to an asset class? Over time, --aka, diachronically-- diversification through holding a large number of positions can be achieved.

What you need to do is to step back from the daily hysteria and to think through #1, what is it is you’re really trying to achieve. #2, whether the current market offers the opportunities you need, and #3 whether you really willing to do the work that high-returns investing requires.

Meanwhile, get a hold of a copy of Ben Graham’s book, The Intelligent Investor and work your way through that. I’d also recommend Justin Mamis’, The Nature of Risk

IMHO, this current market sucks majorly, and it’s the shorts --not the longs-- that will be making the money. The rest of us are in for a beating.

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The YIELD function doesn’t work either. Any ideas?

Mark,

The yield function works just fine. You aren’t feeding it the correct values.

‘price’ needs to be written as a percentage of par, and it can’t be negative.

settlement, 1/5/2023
maturity, 11/29/2023
price, 101.5883
rate, 6.33
frequency, 2
basis, 1 (which is ‘actual/actual’, though this value can be omitted or a 360 day year can be used. CF Excel’s Help function.)

YTM = 4.782130612

Just a guess-try putting those two initial cash flows on a single row.

Nope, still not working. I’ve tried lots of things over the years and XIRR periodically simply doesn’t work. It’s been reported frequently through multiple versions of excel, but Microsoft refuses to address the issue.

I’ve had issues with XIRR for decades. For example nobody has figured out how to make it work when the positive cash flow happens first. And I have that all the time when I write options.

Works perfectly fine in Google Sheets. 4.607%.
Another reason I dumped Excel for home use.
Suggestion - try reversing the order of the dates & flows from top to bottom. Weird but I’ve seen it work occasionally.

ChatGPT reportedly can debug excel spreadsheets?

Maybe run it through a ChatGPT query?

ralph

While that may be true, along with other factors, there is an important reason why this is - in my view - an absolutely terrible time to invest in anything but the shortest duration bonds. And to look carefully at your stock portfolio as well.

The issue is the debt ceiling which we hit in early to mid 2023, depending on spending, but as any reasonable discussion of this gigantic macro issue requires some analysis of politics, I refer you to Manlobbie’sMeTAR board at Shrewd'm: A Merry and Shrewd Investing Research and Education Community

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Goofyhoofy,

What I left unsaid was a fourth component. Effective governance. You are considering the fourth element. The foundation, without it, the other elements do not matter.

Personally, I see a debt default by the USA as an inevitable next step on the removal of the dollar as the reserve currency and that step is in itself just another step in the process of disassembling Pax Americana.

That Pax Americana will end is a given, like trees grow age a die. What is not known is how long the USA will survive post Pax Americana. In any case, cataclysmic changes like the fall of the dollar or Pax Americana require thoughtful investment and preparation. I am not convinced that owning dollars is better than owning companies or (in the case of some bonds) a loan against the assets of companies. So, in the case of cataclysmic worldwide economic apocalypse owning companies or commercial paper may be the less risky move.

If the cataclysmic scenario does not play out then the exact same stratagem holds. Use the fear and uncertainty to buy and hold companies and leans against companies.

Cheers
Qazulight (Congress games are about as real as the WWF championship.)

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McCarthy’s concession to make it easier to oust a sitting Speaker has led to concerns on both sides of the aisle that conservatives will hold that threat like a cudgel over McCarthy, deterring him from bringing must-pass legislation — things such as a debt ceiling hike and government funding bills — to the floor even if it has the bipartisan support to pass.

Some moderate Republicans have countered that they can still move such bills by teaming up with Democrats on a procedural gambit, known as a discharge petition, that allows a simple majority to force legislation to the floor even over the objections of the Speaker — an idea that Rep. Brian Fitzpatrick (R-Pa.), a co-chairman of the moderate Problem Solvers Caucus, has promoted this week.

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Thanks Arindam. I am currently reading the intelligent investor…Realizing that I was definitely not one!

"Thanks Arindam. I am currently reading ‘The Intelligent Investor’ …Realizing that I was definitely not one!

Charlie,

Don’t kick yourself too hard for your mistakes.

‘Investing’ isn’t something any of us humans do well for reasons well covered by them who try to combine the study of financial markets with the study of human behavior (aka, ‘behavioral finance’). All of us get yanked around by the emotions of Fear and Greed, Hope and Despair, which is why I find Graham’s intro to value investing so helpful. He speaks to our weak points and vulnerabilities, and he offers sensible ways to deal with them, the chief of which is “Try to obtain a margin of safety by not overpaying”. Or, to say the same thing in a different way, “Don’t make bets you can’t afford to lose.”

Also, right now, financial markets are a mess, and many, many “pros” have been saying for over a year that “nothing makes sense any more”. The explantion is obvious and can be blamed on “Easy Al” and his bailouts that all subsequent Fed heads have continued (which is a post for another time).

Lastly, you need to distinguish between ‘overall financial planning’ and the game of making bets on the level and direction of financial assets (sometimes called ‘investing’, but better regarded as ‘gambling’). What’s going to matter in the long run isn’t learning how to pull more money out of markets than you bring to them but the basics of ‘family, friends, and a meaningful life’.

Suggestion. As I said before, now is NOT the time to be trying to put large amounts of money to work. But “right now” is always a good time to be funding small experiments as a means of gaining experience.

“Caminante, no hay camino. Se hace camino al anadar.”

Arindam

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I concur with Goofyhoofy, or probably would even state it more bluntly. I think discussing macroeconomics without politics is braindead. Times are changing, and not only interpreting the consequence of local political distinction but also looking outwards from USA will be increasingly necessary to have a sense of reality.

Rather than censoring politics I think it is more cultured and intelligent to allow all the facts to be cited, even when carrying a political interpretation, to not suppress ideas which I am convinced is typical to our inadvertent conformity to power. This conformity is brain deadening and we do it all the time.

Instead! We can hugely, hugely emphasise listening and treating others with respect, and attacking ideas and not people. With that, politics used to be discussed all the time, that is how we made progress - and it can, and should, today.

That is the kind, non-censoring culture that I’ll bring to the version of this board at Shrewd’m:

https://www.shrewdm.com/MB?bid=14

Anyone with such a conviction, not to mention preferring the original message format that discourages hyper-alerting Twitter-mind-mush, is welcome.

— Manlobbi

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