Join Early Retirement Today
Reply
 
Thread Tools Display Modes
ISM Questions
Old 01-29-2007, 10:51 AM   #1
Full time employment: Posting here.
 
Join Date: Mar 2005
Location: Punta Gorda, FL
Posts: 828
ISM Questions

I bought some ISM without really understanding it. I know it paid dividends but are they taxed as dividends or interest? I didn't buy much so its really not a big deal, but now I have some additional money I'd like to put somewhere.

How does ISM compare with I-Bonds? It was my understanding that the dividend or interest ISM pays adjust with inflation. But the share price of coarse can vary.

What happens when interest rates go up. Would ISM drop in price or would the dividend go up?







dm is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: ISM Questions
Old 01-29-2007, 10:59 AM   #2
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: ISM Questions

The divies should be taxed as interest -- these are just exchange-traded bonds.

They have a much higher yield than i-bonds, but i-bond interest is tax deferred and principal is guaranteed.

When real interest rates rise, the price of ISM should go down. When inflation rises (which can also make nominal rates rise), the yield of ISM should go up with little or no change in price.
wabmester is offline   Reply With Quote
Re: ISM Questions
Old 01-29-2007, 11:12 AM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 13,148
Re: ISM Questions

Remember in your planning that ISM monthly interest payments will vary significantly. Based on my average cost per share (not par):

12-15-06 through 1-14-07 4.68%

1-15-07 through 2-14-07 3.82%

2-15-07 through 3-14-07 4.58%

3-15-07 through 4-14-07 5.23%



*edited to add additional month

** edited again to correct the mistake I made when I added the additonal month! Sorry 'bout that!



__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Re: ISM Questions
Old 01-29-2007, 11:25 AM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,708
Re: ISM Questions

Quote:
Originally Posted by wab
When inflation rises (which can also make nominal rates rise), the yield of ISM should go up with little or no change in price.
Perhaps. Some of the price pulldown may be attributable to low current inflation. Its conceivable that the issue may become more attractive at higher CPI levels. But then again its a limited, thinly traded issue thats probably not as well known to enough investors to produce any big lift.

The other difference between tips/ibonds and ISM are that while the tips/ibond principal is guaranteed, IIRC one or both can reduce previous gains applied to principal if deflation occurs, while ISM will simply pay no interest without degrading the principal. And since ISM can be bought at a discount now and redeemed for full face value, holders until maturity are all but guaranteed a capital gain.

Its an interesting little critter, for what it is.
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Re: ISM Questions
Old 01-29-2007, 11:46 AM   #5
Recycles dryer sheets
 
Join Date: Nov 2006
Posts: 77
Re: ISM Questions

Quote:
Originally Posted by youbet

12-15-06 through 1-14-07 4.68%

1-15-07 through 2-14-07 3.82%

2-15-07 through 3-14-07 4.58%

3-15-07 through 4-14-07 6.13%
Can you explain your yield calcualtion a bit more? I come up with higher yields for every period when I look at ISM. I understand we have different acquisition costs, but I would expect the difference to be minor. Or my math is simply wrong, which is always a possibility.
Anansi is offline   Reply With Quote
Re: ISM Questions
Old 01-29-2007, 12:20 PM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Mar 2003
Posts: 18,085
Re: ISM Questions

Quote:
Originally Posted by Cute Fuzzy Bunny
Perhaps. Some of the price pulldown may be attributable to low current inflation. Its conceivable that the issue may become more attractive at higher CPI levels. But then again its a limited, thinly traded issue thats probably not as well known to enough investors to produce any big lift.
I am reasonably thoroughly convinced that ISM si grossly misunderstood by its holders, who are mostly unsophisticated retail guys. So when the payout slumps, they will dump it to absurd levels, and when inflation backs up, they will bid it up foolishly. As such, I plan on keeping an eye on ISM, OSM, and PFK for the forseeable future for trading opportunities.
__________________
"All animals are equal, but some animals are more equal than others."

- George Orwell

Ezekiel 23:20
brewer12345 is offline   Reply With Quote
Re: ISM Questions
Old 01-29-2007, 12:24 PM   #7
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: ISM Questions

These issues are so thinly traded that guys like brewer and Ha will single-handedly correct any pricing misbehavior.
wabmester is offline   Reply With Quote
Re: ISM Questions
Old 01-29-2007, 12:29 PM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,708
Re: ISM Questions

Hey, I dumped a few percentage points into it just so I could feel like I was doing something, and I think I made it pop 19c all by myself. :P

Brewer - I had the same feeling...somewhere in the next year or so we might see a little pop and I could make a little lobster/champagne money. Worst case it'll probably come close to matching the better CD rates I can get and i'll get a little pop at redemption time.
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Re: ISM Questions
Old 01-29-2007, 12:35 PM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Mar 2003
Posts: 18,085
Re: ISM Questions

Quote:
Originally Posted by Cute Fuzzy Bunny
Brewer - I had the same feeling...somewhere in the next year or so we might see a little pop and I could make a little lobster/champagne money. Worst case it'll probably come close to matching the better CD rates I can get and i'll get a little pop at redemption time.
That's pretty much how I look at it. Worst case is that I have a high quality bond paying a silly-high spread over CPI that I hold to maturity. Best case is that it oscillates between 21 and 24 several times in the next 5 years.
__________________
"All animals are equal, but some animals are more equal than others."

- George Orwell

Ezekiel 23:20
brewer12345 is offline   Reply With Quote
Re: ISM Questions
Old 01-29-2007, 12:53 PM   #10
Thinks s/he gets paid by the post
 
Join Date: Jun 2005
Posts: 4,005
Re: ISM Questions

I put about 4% of my porfolio into this (got in at 21.33 in december).

Worst case, I make a decent return over 11 years with very little risk.

Best case, it does as brewer says and bumps around 21-24 a few times.
justin is offline   Reply With Quote
Re: ISM Questions
Old 01-29-2007, 01:19 PM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,708
Re: ISM Questions

Quote:
Originally Posted by brewer12345
Best case is that it oscillates between 21 and 24 several times in the next 5 years.
That'd be sweet...I'd love to use up some of my free vanguard trades. Woo hoo, I feel the testosterone flowing now as I ...trade...some...high grade...cpi indexed....bonds...... :P

Wow that doesnt feel the same as swinging around six figure lumps of QQQ's in the late 90's...
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Re: ISM Questions
Old 01-29-2007, 09:24 PM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 13,148
Re: ISM Questions

Quote:
Originally Posted by Anansi
Can you explain your yield calcualtion a bit more? I come up with higher yields for every period when I look at ISM. I understand we have different acquisition costs, but I would expect the difference to be minor. Or my math is simply wrong, which is always a possibility.
Well, here's what I did, following the formula in the prospectus.

For Jan 15 to Feb 14 yields:

CPI Oct '06 201.8 - CPI Oct 05 199.2 / CPI Oct 05 199.2 +2.05 = 3.35

If you purchased as less than par (who didn't?), mulitply by par/your cost.

Questions?
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Re: ISM Questions
Old 01-29-2007, 10:45 PM   #13
Full time employment: Posting here.
 
Join Date: Sep 2006
Posts: 608
Re: ISM Questions

Quote:
Originally Posted by youbet
Well, here's what I did, following the formula in the prospectus.

For Jan 15 to Feb 14 yields:

CPI Oct '06 201.8 - CPI Oct 05 199.2 / CPI Oct 05 199.2 +2.05 = 3.35

If you purchased as less than par (who didn't?), mulitply by par/your cost.

Questions?
Yeah, where do you get this CPI data ? I've tried the Bureau of Labor Stats
(or whatever) website, and there's SO much data there that I can't seem to
just get these simple numbers.

Also, how do you know the interest paid lags the CPI numbers by a couple
months ? Seems kinda odd.

JohnEyles is offline   Reply With Quote
Re: ISM Questions
Old 01-30-2007, 08:00 AM   #14
Thinks s/he gets paid by the post
 
Join Date: Jun 2005
Posts: 4,005
Re: ISM Questions

Quote:
Originally Posted by RustyShackleford
Also, how do you know the interest paid lags the CPI numbers by a couple
months ? Seems kinda odd.
The formula is in the prospectus.

February's interest payment is going to be particularly small. Anyone think that we might see a nice dip due to the low interest payment?
justin is offline   Reply With Quote
Re: ISM Questions
Old 01-30-2007, 08:12 AM   #15
Full time employment: Posting here.
 
Join Date: Oct 2003
Posts: 961
Re: ISM Questions

Quote:
Originally Posted by RustyShackleford
Yeah, where do you get this CPI data ? I've tried the Bureau of Labor Stats
(or whatever) website, and there's SO much data there that I can't seem to
just get these simple numbers.

Also, how do you know the interest paid lags the CPI numbers by a couple
months ? Seems kinda odd.

Rusty,

CPI-U at All Urban Consumers - (CPI-U) from 1913-2006.

- Alec
ats5g is offline   Reply With Quote
Re: ISM Questions
Old 01-30-2007, 08:39 AM   #16
Thinks s/he gets paid by the post
FIRE'd@51's Avatar
 
Join Date: Aug 2006
Posts: 2,433
Re: ISM Questions

Quote:
Originally Posted by youbet

3-15-07 through 4-14-07 6.13%
This one doesn't look right to me. It is inconsistent with your other yields, even based upon your cost.

CPI-U for Dec 2005 = 196.8

CPI-U for Dec 2006 = 201.8

inflation adjustment = -1 + ( 201.8 / 196.8 ) = 0.0254 = 2.54%

April dividend = 2.05% + 2.54% = 4.59% (on par)

yield = 4.59% x ( 25 / cost )
__________________
I'd rather be governed by the first one hundred names in the telephone book than the Harvard faculty - William F. Buckley
FIRE'd@51 is offline   Reply With Quote
Re: ISM Questions
Old 01-30-2007, 08:53 AM   #17
Thinks s/he gets paid by the post
FIRE'd@51's Avatar
 
Join Date: Aug 2006
Posts: 2,433
Re: ISM Questions

Quote:
Originally Posted by dm
How does ISM compare with I-Bonds? It was my understanding that the dividend or interest ISM pays adjust with inflation. But the share price of coarse can vary.
Another difference is the interest from ISM is subject to state & local income taxes (if held in a taxable account) while that of I-bonds / TIPS is not.
__________________
I'd rather be governed by the first one hundred names in the telephone book than the Harvard faculty - William F. Buckley
FIRE'd@51 is offline   Reply With Quote
Re: ISM Questions
Old 01-30-2007, 08:58 AM   #18
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 13,148
Re: ISM Questions

Quote:
Originally Posted by RustyShackleford
Yeah, where do you get this CPI data ? I've tried the Bureau of Labor Stats
(or whatever) website, and there's SO much data there that I can't seem to
just get these simple numbers.

Also, how do you know the interest paid lags the CPI numbers by a couple
months ? Seems kinda odd.

It looks like alec and justin have answered your questions. In addition to the url Alec gave you, you can sign up at the site to receive automatic emails which give you each succeeding month's cpi numbers as they are announced. Very quick and easy and delivered to you the day they are announced!

You really need to read the prospectus. This is not a straight yield calculation because of the time offset. The prospectus is very easy to read and even gives simple examples of doing the calculation.

justin - you would think that if low monthly rates for this period and next were going to drive share price down, they would have done so already. But who knows? Perhaps people actually need to see the low amounts actually credited to their brokerage accounts at the end of the period to decide they'd rather have some of those 6.25% CD's instead and sell.

I'd also like to point out something about the payout scheme for ISM people should think about before they buy. One of the ways ISM is different than TIPS is that at maturity ISM will return your money at par with no inflation adjustment. TIPS will return your money at par plus accrued inflation adjustments. I'm comfortable with the ISM payout scheme, but if someone is looking for their original investment to compound, inflation adjusted, over the holding period, ISM doesn't do it. You receive an interest payment monthly and need to reinvest it.

youbet
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Re: ISM Questions
Old 01-30-2007, 09:09 AM   #19
Thinks s/he gets paid by the post
 
Join Date: Jun 2005
Posts: 4,005
Re: ISM Questions

Quote:
Originally Posted by youbet
justin - you would think that if low monthly rates for this period and next were going to drive share price down, they would have done so already. But who knows? Perhaps people actually need to see the low amounts actually credited to their brokerage accounts at the end of the period to decide they'd rather have some of those 6.25% CD's instead and sell.
It's true that the next couple of interest payments are public knowledge at this point and the div amounts should be baked into the market price. Assuming perfect levels of knowledge of all market participants. However, if Brewer's theory that a good bit of ISM is owned by retail investors who haven't read the prospectus, then they won't know that the div payments are low until they get their february statements or they look at Yahoo! Finance-type websites and see the yield number drop. I'll probably buy another chunk if the price gets close to 21.00.
justin is offline   Reply With Quote
Re: ISM Questions
Old 01-30-2007, 09:27 AM   #20
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 13,148
Re: ISM Questions

Quote:
Originally Posted by FIRE'd@51
This one doesn't look right to me. It is inconsistent with your other yields, even based upon your cost.

CPI-U for Dec 2005 = 196.8

CPI-U for Dec 2006 = 201.8

inflation adjustment = -1 + ( 201.8 / 196.8 ) = 0.0254 = 2.54%

April dividend = 2.05% + 2.54% = 4.59% (on par)

yield = 4.59% x ( 25 / cost )
Thanks FIRE'd@51!!

Yep, my eyes must have crossed when I was looking at the table on the web site. I used the 2005 annual cpi number, 195.3, instead of the 2005 Dec number, 196.8. Well, dang it!

I went back and edited my original post to correct it.

Thanks again!
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
How to answer questions. ???With a question or assignment????? dex Forum Admin 2 02-25-2007 07:56 AM
Safe withdrawal rate questions jhecht FIRE and Money 7 12-18-2006 01:53 PM
Brewer: MLP's questions etc lswswein FIRE and Money 6 03-25-2005 11:52 AM
Perpetual Travel Questions Surfs_Up Life after FIRE 10 10-08-2004 05:34 PM

» Quick Links

 
All times are GMT -6. The time now is 11:34 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2024, vBulletin Solutions, Inc.