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Old 01-09-2024, 04:27 PM   #41
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One thing that I learned recently is to look at the details on corporate callables, especially for non-financial institutions... while the header migh say they are callable in a lot of instances the first call is just a few months before maturity so it isn't a big deal... for me it is effectively non-callable if a Dec 2028 maturity is callable in Jul 2028.
I like to sort on the ‘next call date’ column to search these out. Haven’t gotten around to setting up a search profile for this plus I’m afraid I might filter out something good.
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Old 01-11-2024, 12:48 PM   #42
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I understand the strategy of buying a lower coupon rate CD from the secondary market at below par. It's much less likely to be called if rates start to drop, while still giving a greater total return.

If I do this then is the difference between my purchase price and redemption value considered a capital gain? If so, LT or ST?

If it's a ST gain that would make this strategy much better in an IRA, either Roth or traditional, right?

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Old 01-11-2024, 01:16 PM   #43
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LT vs ST treatment depends on how deeply discounted the bond is and time to maturity. It’s called the de minimus threshold. Buying in an IRA mitigates the issue but Roth really is the way to go
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Old 01-11-2024, 03:05 PM   #44
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Today I purchased another secondary market brokered CD on Vanguard. I got a 5 year Morgan Stanley CD that has a 4.8% YTM/YTW and a coupon of 4.7% but is not callable until Dec 2026. So, while I fully expect it to get called, it still gives me a guaranteed 4.8% rate for 3 years with some potential of having that rate for all 5 years under the off-chance it does not get called. As a side benefit, in my 5 year ladder, I was heavy in all years other than 2026 so it serves the purpose of evening out my ladder as well (if it does indeed get called).

BTW, in the details of the CD it has the words "make whole" which was set to "no". I am not sure what that means, but since Vanguard indicates that the yield to worst is 4.8% whether it matures or gets called, I am not too worried. I think all the CDs may say this. But I just noticed it today. When I googled what it meant, it still was not clear to me.
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Old 01-11-2024, 03:46 PM   #45
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^^^ I think this is the way that the make whole works (but not in your case since it said "no").

Say you buy a $10,000 5-year 3.5% callable CD.

After 3 years the issuer calls it and at the time interest rates for 2-year CDs are 2%.

If the issuer had not called the CD then at the end of 5-years you would have received $11,877 [10,000*(1+3.5%)^5].

At the current interest rate of 2% that you would reinvest the call proceeds in, in order to have $11,877 at the end of two years you would need to receive $11,416 today [(11,877/(1+2%)^2].

The CD with accrued interest is currently $11,087 [($10,000*(1+3.5%)^3].

So when the CD is called the issuer pays you $10,000 principal, $1,087 of accrued interest and a $329 make-whole call penalty for a total of $11,416.

You reinvest the $11,416 for 2 years at 2% and at the end of 2 years have $11,877... the same as if the issuer had not called the CD... so you have been "made whole".
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Old 01-11-2024, 03:57 PM   #46
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^^^ I think this is the way that the make whole works (but not in your case since it said "no").

Say you buy a $10,000 5-year 3.5% callable CD.

After 3 years the issuer calls it and at the time interest rates for 2-year CDs are 2%.

If the issuer had not called the CD then at the end of 5-years you would have received $11,877 [10,000*(1+3.5%)^5].

At the current interest rate of 2% that you would reinvest the call proceeds in, in order to have $11,877 at the end of two years you would need to receive $11,416 today [(11,877/(1+2%)^2].

The CD with accrued interest is currently $11,087 [($10,000*(1+3.5%)^3].

So when the CD is called the issuer pays you $10,000 principal, $1,087 of accrued interest and a $329 make-whole call penalty for a total of $11,416.

You reinvest the $11,416 for 2 years at 2% and at the end of 2 years have $11,877... the same as if the issuer had not called the CD... so you have been "made whole".
Wow! Thanks for that explanation. I think I follow it. So, it sounds like Make Whole is a good thing. But the CD I bought says make whole is set to "no". However, Vanguard lists the Yield to Worst as 4.8%. So I think I am still good since I am happy with a 4.8% guarantee (whether it is called or not). But, if Make Whole would have been set to yes, then presumably I could make even more than 4.8%. Let me know if you disagree.
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Old 01-11-2024, 04:01 PM   #47
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Wow! Thanks for that explanation. I think I follow it. So, it sounds like Make Whole is a good thing. But the CD I bought says make whole is set to "no". However, Vanguard lists the Yield to Worst as 4.8%. So I think I am still good since I am happy with a 4.8% guarantee (whether it is called or not). But, if Made Whole would have been set to yes, then presumably I could make even more than 4.8%. Let me know if you disagree.
If you had bought it as a new issue then you would make the coupon or stated interest rate for the entire original term if it was called with a make whole. Yes, make-whole is a good thing compared to nothing.

If you buy it as a secondary issue then I don't think that would necessarily hold but I suspect that if there was a make-whole that it would be included in the WTC calculation... not sure how though.
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Old 01-17-2024, 07:20 AM   #48
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Snagged two month secondary market CD yesterday - 18% YTM! Yes, only two months, but compare to new issue two month going for ~5.1% and what could be bad?

I was waiting the remainder of the day for Fidelity to call and tell me they were reversing it due to a pricing mistake, but that call never came.
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Old 01-17-2024, 08:35 AM   #49
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Wow. Nice catch. I know it happened before but it didn’t register that they actually called you until I pictured you sitting by the phone waiting. I’m seeing the guy from Better Call Saul but he wanted it to ring.
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Old 01-17-2024, 09:03 AM   #50
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Snagged two month secondary market CD yesterday - 18% YTM! Yes, only two months, but compare to new issue two month going for ~5.1% and what could be bad?

I was waiting the remainder of the day for Fidelity to call and tell me they were reversing it due to a pricing mistake, but that call never came.
Yeah, but what are you gonna do when it matures in two months and you cannot find a rate over 17%?
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Old 01-17-2024, 09:38 AM   #51
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Snagged two month secondary market CD yesterday - 18% YTM! Yes, only two months, but compare to new issue two month going for ~5.1% and what could be bad?

I was waiting the remainder of the day for Fidelity to call and tell me they were reversing it due to a pricing mistake, but that call never came.
I'm confused. Was this a price mistake?
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Old 01-17-2024, 11:48 AM   #52
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Marcus Online Bank is paying 5.35% for 1 year and 5.25% for 18 Months
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Old 01-17-2024, 11:50 AM   #53
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Marcus Online Bank is paying 5.35% for 1 year and 5.25% for 18 Months
Their 1-year has dropped in the past week. It was 5.5% recently.
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Old 01-17-2024, 12:15 PM   #54
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Their 1-year has dropped in the past week. It was 5.5% recently.

Yes it's a concern...I want to cash some Ibonds that were purchased a few years back, but by the time I get the cash to them, the rate could drop more..not sure it's worth it.
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Old 01-17-2024, 12:31 PM   #55
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Yes it's a concern...I want to cash some Ibonds that were purchased a few years back, but by the time I get the cash to them, the rate could drop more..not sure it's worth it.
Does this help:

CD Information Guide | Marcus by Goldman Sachs®

Marcus
https://www.marcus.com › savings › cd-info-guide
While it takes a minimum of $500 to open a CD, you can keep adding to your balance for 30 days after opening.
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Old 01-17-2024, 12:46 PM   #56
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Does this help:

CD Information Guide | Marcus by Goldman Sachs®

Marcus
https://www.marcus.com › savings › cd-info-guide
While it takes a minimum of $500 to open a CD, you can keep adding to your balance for 30 days after opening.

That's helpful Thanks.
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Old 01-17-2024, 04:16 PM   #57
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Yes it's a concern...I want to cash some Ibonds that were purchased a few years back, but by the time I get the cash to them, the rate could drop more..not sure it's worth it.
Are they paper i-bonds? If they are in Treasury Direct then you get the cash in your linked bank account the next day... rates aren't dropping that fast!
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Old 01-17-2024, 05:04 PM   #58
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I'm 3-month laddering $300K @ $100K/month and today got 5.35% on secondary market zero coupon treasuries. I login and make the purchase once a month. This is basically practice for the day I ever acquire a great deal of cash from RMD, routine sale or rebalancing. It has been a nice exercise to figure out how this works as there is a certain amount of nuance that I don't get by just looking at it and not trading.

I'm OK with the hassle of logging in once a month to maintain the ladder and I like the ability to choose the expire date based on the yield differences rather than putting this on autopilot. It also gives me a chance to pull the plug on this method when rates drop precipitously at which point I will DCA into SPY-equivalent.

That said, I was a day early and decided to try buying the next 3-month rung on margin and paying 1 day margin. I called the rep and asked what the rate was. It is not published until you actually borrow the money (in this case it is Merrill Edge). He went through the process and let me know it has two rates, a base rate and a markup, today it was 5.436% with markup 7.25% so 12.686%. Effectively borrowed $98.xK one day margin or 1/365th of 12.686% or about $35. My yield on the zero coupon is near $15 so I'm paying $20/day margin for the privilege of not waiting for expiration day.

The cool thing is I now have budgetary numbers in my head, something I did not have before I made this margin buy and phone call to the broker at Merrill Edge. Margin on $100K ladder rung is about $20/day at today's rate. Since my time is highly valued the $20/day is cheap for my imagined budget in my brain. I had no clue, it could have been $5 or it could have been $50, I just had no idea. From that standpoint I am very satisfied with this exercise.

What is the significance of this and why am I taking the time to write this up you may ask? I am sure there are FI people out there who have no idea about the secondary zero coupon market and how it works. I believe the only way to learn this stuff is by actually digging in and doing it. Some might say, "Oh, you just do this or that, it's quite simple" which neglects the fact that many of us FI people got to become FI by studying, observing, listening and VERIFYING our investment and savings methods. Those that don't just use a full service like Edward Jones, pay the fees and are satisfied with their sales rep, all the power in the world to them. I am a disciple of Bob Brinker who highly respects John Bogle and Vanguard but the methods are all similar (diversification, hyper-minimize expense ratios, stay away from annuities, etc.) and I also have an MBA in applied econometrics (math) so the numbers are my comfort zone.

I had no idea that a zero coupon secondary market existed, let alone how it worked. I only heard buzzwords about Treasury Direct which seemed like a hassle to open another account. I only have the Merrill Edge account because of a promotion 7 years ago where they were giving away free money for depositing assets. I don't remember the numbers but it was something like $700 for a $100K deposit, no strings attached. I am a sucker for free money so I transfered some ESPP/RSU shares from my previous employer and they gave me $700 cash for that deposit. A sales rep called me shortly thereafter and offered another $700 for more assets so another $100K went in. I think in total I collected $2100 in "bonuses" for depositing my ESPP shares. The bulk of our investable assets are at Vanguard but I kept Merrill Edge just because they were nice enough to give me this free money. They offer most of the same benefits that VG, Fid and Sch offer so no compelling reason to close the account yet.

I slowly started selling off my ESPP/RSU stock and put it into the Magnificant 7 (minus Tesla as I view that company as radioactive and subject to detonation anytime now) and those 6 tech stocks have all performed very well in that time. This account is like playing with house money at this point as it has increased 500% in 6 years with this DCA approach. Now I'm slowly moving some of that gain into cash, hence the need to put it somewhere for now so the 3 month ladder with zero coupons was tried out.

I would never recommend this method to anyone unless you had the innate curiosity and desire to dabble in short term zero coupons. I plan to exit when rates drop below 4.75%. Why? No other reason than I just made up that number, feel comfortable with it and have a disciplined plan in place. I anticipate I'll start accumulating more cash positions in 3-4 years while being far more risk averse and may be seeking something that is essentially zero risk.
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Old 01-17-2024, 09:03 PM   #59
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Thanks for the write-up. I thought Brinker was great, too. I already knew about zeroes in the secondary market, but now I know more.
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Old 01-18-2024, 05:23 AM   #60
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Yeah, but what are you gonna do when it matures in two months and you cannot find a rate over 17%?

Doesn't matter. If you were willing to take a two month CD at 5.1%, why wouldn't you choose the equivalent one yielding 18%? You'd be in the same place in two months, but with more than 3x the return generated in the same amount of time.
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