Bonds for Newbies

[skippybangkok]

General question.

 

when I buy a bond, how to exit. ?  need to wait a long time

 

Generally what happens when the bond comes to term ? 

 

Thanks 

[allane]

1. You should be able to sell it back to whatever broker you bought it from, though at a lower price than you might want. The difference between their Buy and Sell prices is how they make their money. Or, you can hold it to its maturity date.

2. When the bond matures (comes to term), you receive its face value plus the final coupon. Where I come from, semi-annual coupons are the norm.

 

[topt]

19 minutes ago, allane said:

1. You should be able to sell it back to whatever broker you bought it from, though at a lower price than you might want. The difference between their Buy and Sell prices is how they make their money. Or, you can hold it to its maturity date.

2. When the bond matures (comes to term), you receive its face value plus the final coupon. Where I come from, semi-annual coupons are the norm.

 

As long as he is talking about fixed income securities type bonds and not some esoteric so called savings bond.............

[skippybangkok]

Yes... fixed income


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[ExpatJ]

I just put 20% of my investment cash into bonds- Vanguard Total Bond ETF (BND)- covers corporate and public bonds- yield about 2.5%, and , crucially,  fees are only 0.06%. 

[rak sa_ngop]

Check out the BBC news item "Are we headed for a bond market bloodbath" posted on their news website 14 hours ago.

[partington]

20 minutes ago, rak sa_ngop said:

Check out the BBC news item "Are we headed for a bond market bloodbath" posted on their news website 14 hours ago.

The same story has been published every year for at least the last 5 years. Quantitative easing - governments buying their own bonds especially- sustains higher bond prices, and so bond prices, inevitably, will decrease in future.

 

However, even when quantitative easing ceases and interest rates go up, this does not happen overnight but gradually. The way to avoid huge effects on your portfolio is to focus on short term bonds, that is bond funds containing bonds that will mature in 1-5 years. That way a 1% rise in interest rates will only lower bond face values by 1-5%, and if you keep the fund for 5+ years (the minimal period for any non-cash investment to be worth while) the value will be sustained because the original bonds will mature and therefore recoup their original face value, so no capital loss will occur.  New bonds at current sustainable prices will then take their place in the fund.

 

There are 1-5 year UK gilt fund ETFs (SPDR) and short term bond funds (Vanguard) readily available. Return is low, but bonds are not for returns primarily-they are to limit volatility in your total portfolio value in the event of equity crashes. That is, they should be as risk-free as possible, having the same role as fixed interest cash deposits.

[Sheryl]

Perhaps a silly question, but if they have the same interest rate as fixed interest cash deposits, then what is the advantage to them?

 

[Naam]

On 3/18/2017 at 5:21 PM, allane said:

2. When the bond matures (comes to term), you receive its face value plus the final coupon.

...if the debtor does not default.

[topt]

1 hour ago, Sheryl said:

Perhaps a silly question, but if they have the same interest rate as fixed interest cash deposits, then what is the advantage to them?

 

He actually said -

1 hour ago, partington said:

having the same role as fixed interest cash deposits.

Depending on what you buy and your attitude to risk returns can be far greater. Some individual bonds carry coupons of over 10% but many trade above their face value - or you could lose the lot as Naam mentions ........

You would have problems finding 2.5% yield on cash deposits at the moment (quoted by ExpatJ above for a specific ETF)

[ExpatJ]

2 hours ago, rak sa_ngop said:

Check out the BBC news item "Are we headed for a bond market bloodbath" posted on their news website 14 hours ago.

 

"Folks are selling bonds and buying shares."  Yes but for how long? 

 

Just google stock market bubble and you will see that the vast majority- if not all articles (apart from this one:) talk about an upcoming massive sell off of stocks i.e. we are in a frothy stock market bubble not seen since dot.com and 2007 crashes. This is the reason i increased my bonds from 15-20% of holdings- when stocks crash, bonds go up.

 

(In terms of liquidity, that is an issue for individual bonds- but the ETF mentioned is 35 billion $ , dont think you will struggle to sel if you are a retail investor)

[ExpatJ]

1 hour ago, Sheryl said:

Perhaps a silly question, but if they have the same interest rate as fixed interest cash deposits, then what is the advantage to them?

 

Bonds are a way to hedge / balance your investments- if you have money in bonds and stocks- when one crashes, the other goes up. You don't get that with cash savings in a bank. 

[partington]

1 hour ago, Naam said:

...if the debtor does not default.

You are quite right- I should have explained by saying I mean government bonds in the currency of your country of residence providing that country has an AA rating or higher- in my case I only have UK gilt funds or global government funds with average rating AA or higher, hedged to GBP.

 

I  avoid corporate bonds as they do not have the same lack of correlation to equities as government bonds do.

 

EDIT my mistake - that remark was not in response to my post- still my comment may be useful.

Edited March 21, 2017 by partington

[Naam]

13 minutes ago, ExpatJ said:

Bonds are a way to hedge / balance your investments- if you have money in bonds and stocks- when one crashes, the other goes up. You don't get that with cash savings in a bank. 

i (not so) humbly beg to disagree with "when one crashes, the other one goes up" i am exclusively investing in bonds since 40 years. and during that period there were hardly any years when the average of global stock indices beat the yield of "my" bonds.

 

caveat: there are bonds and there are bonds. i am talking about high yield/high risk bonds which, even in today's low interest environment, yield up to 20% per annum.

 

but the rule interest rates up = financial asset down applies to both stocks and bonds.

 

 

[Naam]

1 minute ago, partington said:

I  avoid corporate bonds as they do not have the same lack of correlation to equities as government bonds do.

but that's where one still finds yield  today's average yields of government bonds means noodle soup from street vendors instead of steak. and even the noodle soups are out of question when it pertains to a bunch of government AAA rated bonds which have negative yields.

 

https://www.bloomberg.com/markets/rates-bonds/government-bonds/germany

[ExpatJ]

1 hour ago, Naam said:

i (not so) humbly beg to disagree with "when one crashes, the other one goes up" i am exclusively investing in bonds since 40 years. and during that period there were hardly any years when the average of global stock indices beat the yield of "my" bonds.

 

caveat: there are bonds and there are bonds. i am talking about high yield/high risk bonds which, even in today's low interest environment, yield up to 20% per annum.

 

but the rule interest rates up = financial asset down applies to both stocks and bonds.

 

 

Corporate bonds of course are linked to stocks more closely - government bonds not. 

[partington]

2 hours ago, Naam said:

but that's where one still finds yield  today's average yields of government bonds means noodle soup from street vendors instead of steak. and even the noodle soups are out of question when it pertains to a bunch of government AAA rated bonds which have negative yields.

 

https://www.bloomberg.com/markets/rates-bonds/government-bonds/germany

This is true: as I tried to make clear, for me bonds are not for returns - they are for compensating for the risk of investing in volatile equities, with the aim of making a portfolio less volatile in times of financial crisis.

 

I use them for stability, as a cash equivalent. If they simply maintain value at the pace of inflation this is still fine by me. I am not using them for yield - to me the capital value and the interest gained added together when I sell is the measure I pay attention to, and the strategy of using short term government bonds fulfills my goal for having them.

 

Your goals are different, obviously.

Edited March 21, 2017 by partington

[gk10002000]

I have bought and sold dozens of bonds and currently hold several.  Municipal, Corporate, etc..  I hold or have held several bond funds. My brokerage account is Etrade.  When selling a bond, you ask for a bond quote.  Etrade passes this on to their bond desk and tells you about how long before you will get an answer back, and for how long the quote is good for.  Usually the quote is returned within 30 or 50 minutes and is good for 20 minutes or so.  Then you will see the bond quote back which says how much the other party is willing to pay.  You then can sell the bond.  It may take several minutes for the transaction to show completed and the bond sold and the monies in your account.   Some bonds don't attract much attention, but I have never not been able to sell a bond.  You may have to sell it for a loss, or the quote may come back for a price higher than you paid so you will net a capital gain. If this is done in one of your IRA accounts not much else happens.  If you do this in your brokerage account, then the buy/sell transaction is shown on the capital gains/losses and you have to deal with that at tax filing and the transaction will be on the 1099 Div and you get to play with the Schedule D and/or Form 8949.  Note, when you sell you will also receive the interest earned since the last interest period.  The new buyer has to pay you for that.  Bond funds (mutual or ETF) can in general be bought or sold without any back and forth, although some funds such as NEA or NUW that are Closed end funds may not let you sell all at once since the bond buyers out there may not be willing to buy as much as you are selling.  I just ran into that trying to place an order for 40K USD of NUW.  The buy order was rejected and Etrade notified me right away of the current buy orders out there, so I lowered the amount I was buying and was able to buy using three separate orders.  Just a feature of Closed End Funds or Funds with little buyer interest.

 

As far as what happens when it comes to term, I have held several bonds until term.  What happens is you get the interest from that final period, and the bond is sold at PAR. This is important.  Because even though you may see the bond value as 102, but you paid, say 98, it will be sold at PAR which is typicall 100.  I have also had some bonds redeemed before their final term.  This usually happens more with municipal bonds then with corporate bonds, and is just the nature of the beast.  Most Muni bonds have call features, some are called extra ordinary, some can just do it almost anytime they want, some are listed as can't be redeemed early.  It depends on the bond.  But again, when redeemed, they are sold at the PAR price.  Corporate bonds tend to be not callable, but there are variations.

 

Now I am not talking about zero coupon bonds which are another variation on things.  Those are a bit different and you can look into those if you think they fit what you want to do

Edited March 22, 2017 by gk10002000
update

[Naam]

37 minutes ago, gk10002000 said:

I have also had some bonds redeemed before their final term.  This usually happens more with municipal bonds then with corporate bonds, and is just the nature of the beast.  Most Muni bonds have call features, some are called extra ordinary, some can just do it almost anytime they want, some are listed as can't be redeemed early.  It depends on the bond.  But again, when redeemed, they are sold at the PAR price.  Corporate bonds tend to be not callable, but there are variations.

nowadays the majority of corporate bonds have embedded call options. they are clearly specified in the individual bond description.

 

when bonds are redeemed, whether by maturity or by call, they are redeemed not "sold". i apologise being a beancounter 

[ExpatJ]

16 hours ago, partington said:

This is true: as I tried to make clear, for me bonds are not for returns - they are for compensating for the risk of investing in volatile equities, with the aim of making a portfolio less volatile in times of financial crisis.

 

I use them for stability, as a cash equivalent. If they simply maintain value at the pace of inflation this is still fine by me. I am not using them for yield - to me the capital value and the interest gained added together when I sell is the measure I pay attention to, and the strategy of using short term government bonds fulfills my goal for having them.

 

Your goals are different, obviously.

Lats night was a good example-  stocks dropped by 1-2 % , but all my bond ETFs went up.