Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!
Old 11-17-2006, 12:45 AM   #41
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!

Quote:
Originally Posted by JohnEyles
Well, the current yield is actual precentage I'll earn of the money I actually put in, right ?
You can sort of think of it as the "instantaneous" yield. It's simply the result you get by taking the first coupon payment and dividing by the price you paid for the bond. But the bond value, in this case, is guaranteed to get smaller as you get closer to maturity, so the yield gets continuously reduced. The YTM captures your overall yield through maturity.

Believe me, if it were possible to get a 4% real yield today from bonds, I would be backing up the truck and loading up.
__________________

__________________
wabmester 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: TIPS: Buy Bond or Bond FUND? Pros & Cons please!
Old 11-17-2006, 04:48 AM   #42
Full time employment: Posting here.
 
Join Date: Nov 2003
Posts: 926
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!

Quote:
Originally Posted by bamsphd
Because inflation MIGHT average more than say 10% over the next 3 years.
It certainly has been worse than that before, and could be that bad again.
Or it might be 20%. Or you may contract amoebic dysentery or terminal
blee-bly-bloatus. Thoughtful caution is good but you just can't protect against/foresee everything. Hope for the best and have a plan for the
worst.

JG
__________________

__________________
Some of us have pretty stories, about good friends, good times and noodle salad.
Mr._johngalt is offline   Reply With Quote
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!
Old 11-17-2006, 01:40 PM   #43
Full time employment: Posting here.
 
Join Date: Sep 2006
Posts: 608
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!

Quote:
Originally Posted by wab
You can sort of think of it as the "instantaneous" yield. It's simply the result you get by taking the first coupon payment and dividing by the price you paid for the bond.
Yes.

Quote:
But the bond value, in this case, is guaranteed to get smaller as you get closer to maturity, so the yield gets continuously reduced. The YTM captures your overall yield through maturity.
I don't think this is correct, if you mean the interest payment "gets continuously
reduced". The interest payment is already reduced from the 4.25% coupon to the
4.05% "current yield" by the price premium paid 104.8. But as the principal is
adjusted upward by inflation, the interest payment still gets larger.

The only sense in which the "bond value gets smaller" is if the bond is sold before
maturity (and even this doesn't happen unless interest rates rise and make the
4.25% coupon not seem so desirable anymore). And yes, of course the final principal
paid out is reduced by the 1.048 factor. Which is why, as you point out, the YTM is
considerably less than the current yield - to a first apporximation, I believe it's the
current yield MINUS the price premium annualized over the time one owns the
bond.

Hate to keep hammering on this, but want to make sure my understanding is correct ...



__________________
JohnEyles is offline   Reply With Quote
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!
Old 11-17-2006, 02:03 PM   #44
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!

Quote:
Originally Posted by JohnEyles
Hate to keep hammering on this, but want to make sure my understanding is correct ...
Yes, what you're saying is correct, but the market only cares about YTM. Think of it this way: somebody is selling you 3 years of coupon payments and one principal payment. You pay 104.8 upfront, and over 3 years they give you 4.25 + 4.25 + 4.25 + 100. So, your total (real) return over 3 years is 112.75 / 104.8 = 7.6%. Annualized, that comes out to something like 2.5%.
__________________
wabmester is offline   Reply With Quote
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!
Old 11-17-2006, 03:48 PM   #45
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!

Some time back a NYSE traded security, ISM, was mentioned here on the board. From what I could tell, it's based on a Sallie Mae (SLM Corp) floating rate note (cuspid 78442P601), expires 1/16/18, which is linked to CPI with a 2.05% spread. Issued at a $25 PAR, it's now trading at about $22.25 which, to me, makes it look fairly attractive.

I wonder if anyone else is looking at this type of investment in lieu of TIPS or I Bonds?
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!
Old 11-17-2006, 04:10 PM   #46
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Dawg52's Avatar
 
Join Date: Feb 2005
Location: Central MS/Orange Beach, AL
Posts: 7,446
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!

I bought some earlier this year at $22.50. I was just trying to decide whether to buy a little more. Brewer, what you think?
__________________
Retired 3/31/2007@52
Full time wuss.......
Dawg52 is offline   Reply With Quote
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!
Old 11-17-2006, 04:11 PM   #47
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!

Quote:
Originally Posted by youbet
Some time back a NYSE traded security, ISM, was mentioned here on the board. From what I could tell, it's based on a Sallie Mae (SLM Corp) floating rate note (cuspid 78442P601), expires 1/16/18, which is linked to CPI with a 2.05% spread. Issued at a $25 PAR, it's now trading at about $22.25 which, to me, makes it look fairly attractive.

I wonder if anyone else is looking at this type of investment in lieu of TIPS or I Bonds?
Brewer likes ISM and OSM for some reason. Seems like the yield is lower than TIPS, and the risk is a little bit higher than TIPS, so I don't see the attraction.
__________________
wabmester is offline   Reply With Quote
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!
Old 11-17-2006, 04:50 PM   #48
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!

Quote:
Originally Posted by wab
Brewer likes ISM and OSM for some reason. Seems like the yield is lower than TIPS, and the risk is a little bit higher than TIPS, so I don't see the attraction.
Yep, Brewer did mention them. I've been trying to understand them a little better ever since then. I purchased a token 100 and plunked them in one of the grandkids ESA account just to watch...... They've been spitting out something between 6.5% - 7.0% (annualized and based on the $22.40 I paid for them) the 15th of every month.

Why do you say the yield is lower? Did you consider the discount to PAR?

Agree on the risk. They aren't Gov issue. But, I think Sallie Mae would be a pretty low risk??
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!
Old 11-17-2006, 05:00 PM   #49
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!

Quote:
Originally Posted by youbet
Why do you say the yield is lower? Did you consider the discount to PAR?
Hmm, I was going by the stated yield I read off some quote. But calculating the YTM myself, it looks pretty attractive.

Assuming coupon is 2.05%, maturity is 11 years, and price is 88.8 (4 x 22.2), then the YTM is 3.28% real, which is a bargain!

Edit: I guess it comes down to whether you actually get 25 back at maturity. Anybody know how these things work at maturity?
__________________
wabmester is offline   Reply With Quote
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!
Old 11-17-2006, 05:41 PM   #50
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!

Quote:
Originally Posted by wab
Hmm, I was going by the stated yield I read off some quote. But calculating the YTM myself, it looks pretty attractive.

Assuming coupon is 2.05%, maturity is 11 years, and price is 88.8 (4 x 22.2), then the YTM is 3.28% real, which is a bargain!

Edit: I guess it comes down to whether you actually get 25 back at maturity. Anybody know how these things work at maturity?
I just scanned the prospectus and they don't specifically explain what happens at maturity. They did say in the tax section, that the difference between what you paid and what you receive at maturity would be considered ordinary income, not capital gain, for tax purposes. That implies, but doesn't specifically say, that you get PAR $25.

Go here http://www.salliemae.com/

Click on "investor" at the bottom of the page. Then click on loan trusts. Pick the 2018 maturity year. Then cuspid 78442P601.
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!
Old 11-17-2006, 06:22 PM   #51
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!

I found a pricing supplement, but I could find the full prospectus. From what I saw, it looks kosher. Without reading the full prospectus, I can't tell how the debt is secured (is it senior unsecured debt of SLM or collateralized student loans?)

I'll probably buy some once I can find the details.
__________________
wabmester is offline   Reply With Quote
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!
Old 11-19-2006, 06:58 AM   #52
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!

I like ISM and OSM and I find them attractive, especially as they approach 22. You get 100 or so BP of extra spread over TIPS for exposure to an A-rated credit and the bonds often trade down when it seems like they shouldn't (translation: illiquidity sometimes gives you a bargain). At maturity, you do indeed get $25 back.

These things are more akin to an I bond than TIPS, though. They also have an advantage over TIPS in that you get your inflation adjustment every month as cash on the barrel head, so if we subsequently enter a period of deflation (highly unlikely, IMO) you won't get the deflation taken out of your principal.

The best free source for info on ISM, OSM and other retail income securities that I know of is www.quantumonline.com I think they will make you register, but since I am registered as "Heywood Jahblowme", I think it is pretty informal.

As these things head for 22, I am increasingly interested in adding to my position. A nice, low risk play, IMO.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!
Old 11-19-2006, 09:39 AM   #53
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!

Thanks for the reference to quantumonline. I had registered there long ago but hadn't used it much. Info was easy to get there.

Elementary question, although ISM is traded as an equity on the NYSE, I'm correct to count it as "fixed" in my asset collection, yes?






__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!
Old 11-19-2006, 09:41 AM   #54
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!

Quote:
Originally Posted by youbet
Elementary question, although ISM is traded as an equity on the NYSE, I'm correct to count it as "fixed" in my asset collection, yes?
Yes. It is an inflation indexed bond that happens to trade on the exchange.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!
Old 11-19-2006, 09:43 AM   #55
Thinks s/he gets paid by the post
redduck's Avatar
 
Join Date: Mar 2005
Location: yonder
Posts: 2,076
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!


Let me introduce you to the guy whom I count on for bond information. He answers to the name...

Heywood Jablowme

(perhaps this explains why he's an authority on TIPs).
__________________
Carpe cōleī
redduck is online now   Reply With Quote
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!
Old 11-19-2006, 10:17 AM   #56
Full time employment: Posting here.
 
Join Date: Aug 2005
Posts: 942
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!

OK, I'll bite. Who is Heywood Jablowme ?
?
__________________
modhatter is offline   Reply With Quote
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!
Old 11-19-2006, 10:20 AM   #57
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
REWahoo's Avatar
 
Join Date: Jun 2002
Location: Texas Hill Country
Posts: 42,156
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!

Quote:
Originally Posted by modhatter
OK, I'll bite. Who is Heywood Jablowme ?
__________________
Numbers is hard

When I hit 70, it hit back

Retired in 2005 at age 58, no pension
REWahoo is offline   Reply With Quote
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!
Old 11-19-2006, 10:39 AM   #58
Recycles dryer sheets
 
Join Date: Nov 2006
Posts: 77
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!

OSM has looked good to me since I first ran into it. I bought it a while back and have continued to add to it. I still don't have a huge stake, but it is the most conservative fixed income investment I own.
__________________
Anansi is offline   Reply With Quote
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!
Old 11-19-2006, 03:12 PM   #59
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!

Quote:
Originally Posted by Anansi
OSM has looked good to me since I first ran into it. I bought it a while back and have continued to add to it. I still don't have a huge stake, but it is the most conservative fixed income investment I own.
What is a trickster god doing with such a conservative investment?

I made 10 gallons of winter stout today.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!
Old 11-19-2006, 04:02 PM   #60
Recycles dryer sheets
 
Join Date: Nov 2006
Posts: 77
Re: TIPS: Buy Bond or Bond FUND? Pros & Cons please!

Quote:
Originally Posted by brewer12345
What is a trickster god doing with such a conservative investment?

I made 10 gallons of winter stout today.
Bonds are kind of boring, but I have to put money somewhere and most things just look too expensive right now. I only mentioned it because I do like OSM better than TIPS. But I like beer better than either.
__________________

__________________
Anansi is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
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
Hold TIPS in a fund or buy them direct??? billystu FIRE and Money 15 12-13-2004 10:20 PM
Useful to hold foreign bond fund? soupcxan FIRE and Money 16 11-07-2004 06:20 AM
ETF Tips Fund DFW_M5 FIRE and Money 5 08-19-2004 09:34 AM
Vanguard changing bond fund names cute fuzzy bunny FIRE and Money 5 06-11-2004 02:31 PM
TIPS vs. Mutual Fund with TIPS? Telly FIRE and Money 12 07-16-2003 12:21 PM

 

 
All times are GMT -6. The time now is 04:53 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.