Bond purchase consideration

[fisherman]

I am considering a local city hospital bond. the bond is rated A1 and pays 5.5%. In my state this bond is state tax free and of course Federal tax free also. It is callable in 10 years. I would use some of our money now in a money market at 3.3% taxable so it is an improvement in rate but is it a good place to park some cash?

Looking for and appreciate your opinions?

 

[clifp]

If it is callable in 10 years, I am assuming it matures in 20 to 30 years. 10,20,30 are all long term investment, so I wouldn't characterize this as a place to "park" money.
There is generally a pretty big mark up for Muni bonds for us retail investors (1-2% is not uncommon) so that when I buy a muni bond I intend to hold until maturity. Think of it equivalent to buying a house, you may want to keep it forever, but you definitely don't want to own it only for a 6 months to a year.

I am not qualified to give advice on the specific bond. In general bonds tied to a specific revenue source, Hospital, Airport are considered riskier than General Obligation bonds (GO). 5.5% is higher than most A1 rated muni bonds, most A1+ rated revenue bonds I saw at Schwab were in the 4.5% range. In summary Muni bonds are safe and offer attractive rates right now, but you are investing in the riskier part of a safe market.

 

[fmhealth]

I believe this is a potentially dangerous idea. What is your recourse if the hospital goes BK? As previously mentioned, GO Bonds offer a much safer & diversified alternative to Revenue Bonds.

In the current envoirnment, I don't believe the premium you're receiving compensates you for the risk you may be taking. In any event, best of luck!

 

[chinaco]

I would use a bond mutual fund or ETF. Diversification!

 

[fisherman]

The markup is .0025 if I am calculating it right. I am look at 60K and the fee is $150 for that amount. I hear and totally agree on the GO comments. This hospital is a city hospital in the fastest growing city in my state so for the short term it should not be an issue and I have never heard of a hospital failing but I am sure it could and has happened. I have looked at bond funds but cannot get that rate non taxable. There is risk as you all have pointed out and I really appreciate the comments. I may pass on this one since it will probably be sold out by Tuesday anyway. They usually do not offer large amounts of this kind of bond around here so they go fast with the old population that buy them and live of the interest.


I really do appreciate the help and education.

 

[clifp]

Is this bond being offered to city residences? Or just something that a broker alerted you too. If it is a local special it maybe worth considering. You are getting somewhere 50 points higher than other A1 rated bonds if this is a 10 year bond, if it is 30 years, it is nothing too special.

 

[Art G]

Muni bonds are starting to look really attractive again. I have bought in the last couple weeks a 5.87% A rated revenue toll road bond and a 6% non rated GO street repair bond.
The questions I would ask is, did you pay a premium for the bond? Hospital bonds will have an extraordinary call feature so the call date doesn't mean that much. Hospital bonds do tend to be risky and even being in a well populated area does not insure the current hospital will maintain ownership. JMO

 

[Stevewc]

Hello Fisherman,
Are you buy chance in Alabama? The reason I ask is there was resonantly a similar bond in my area. I'm looking into individual muni's for the first time. Never bought any but probably about to in the next couple weeks. I know of a new issue about to float, now in waiting. Any tips or clues to help protect me from being ripped off by brokers would sure help.
Thanks for any help or advise,
Steve

 

[Art G]

I would use a bond mutual fund or ETF. Diversification!

In my opinion, the bond mutual fund is about the worst investment you can make.....well, not the worst, but not good. JMO

 

[soupcxan]

In my opinion, the bond mutual fund is about the worst investment you can make.....well, not the worst, but not good. JMO

And what do you propose instead? Some sort of insurance/annuity?

 

[Art G]

And what do you propose instead? Some sort of insurance/annuity?

BWHAHAHAHAHAHA! How clever of you. If only your reading skills were half as impressive as your comical skills. As I posted above, municipal bonds are looking attractive.

Fer example.....

Permanent School Fund Guaranteed 5% at PAR
Aaa 500m Clint ISD PSF 5.00 8/15/33 @ $100 ​

 

[soupcxan]

BWHAHAHAHAHAHA! How clever of you. If only your reading skills were half as impressive as your comical skills. As I posted above, municipal bonds are looking attractive.

Plenty of reasons why bond funds are better than individual issues for the retail investor:
- Illiquid markets makes it hard to sell if you need to get out quickly
- High bid/ask spreads and lack of transparency on bond pricing
- Difficult to get proper diversification unless you have $MM in your portfolio, so if only one issue defaults you will feel it

Thanks for your sarcasm, you've earned the honor of being the first person I've put on my ignore list.

 

[Art G]

Aha! I love the uninformed ignore. It makes explaining things so much easier.
To those who care to learn,
Bond funds go down in value during rising interest rate environments.
Bond funds go down in income during dropping interest rate environments
They have no duration.
They are impossible to regulate whether or not the manager has bought risky bonds.

Individual bonds are totally liquid and I can sell one in minutes AND I can shop the price.
I can easily research them, and can support my own city if I choose to.
I can ladder zero's, or merely buy one bonds and I'll know what my income will be.
If I hold to maturity I will get my money back.
If they get called early, I can often times get back extra.

 

[ats5g]

Thanks for your sarcasm, you've earned the honor of being the first person I've put on my ignore list.

Welcome to the dark side.

 

[FIRE'd@51]

Aha! I love the uninformed ignore. It makes explaining things so much easier.
To those who care to learn,
Bond funds go down in value during rising interest rate environments.
Bond funds go down in income during dropping interest rate environments
They have no duration.

The bold statements are contradictory, since duration is a measure of a bond's (or bond fund's) price-sensitivity to interest rate changes.

The word you are looking for is maturity, not duration.

 

[Art G]

The bold statements are contradictory, since duration is a measure of a bond's (or bond fund's) price-sensitivity to interest rate changes.

The word you are looking for is maturity, not duration.

You're right, I did mean maturity. Thanks for catching it.

 

[Raygun99]

Is there any model for bonds to secure a guaranteed 5+ return over 30 years? Is laddering the aproach? If so are there any models out there to show the risk?