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Learning about Bonds
Old 09-23-2019, 01:26 PM   #1
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Learning about Bonds

I've begun researching individual bonds, specifically municipal bonds, for building a bond ladder. Some of the interest rates seem higher than I would have expected. I use Schwab and they have a nice research portal and through it I found a bond fund called "Harris County Texas GO 7%". It has a maturity date of 8/1/2023, a AA rating, not callable. I'm looking for something safe and tax-free. Why wouldn't I put this as the first rung of my ladder? What am I missing? Thanks for any help!
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Old 09-23-2019, 01:53 PM   #2
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You need to look at yield to maturity. The 7% refers to the coupon, but you will pay a premium for that coupon which lowers your yield. So use YTM to make your bond buying decisions.
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Old 09-23-2019, 01:56 PM   #3
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Get familiar with emma.msrb.org - it is a requirement for all municipal investors when doing research.

As far as your Harris County muni - do you have the CUSIP for it?

It may be a 7% coupon, but with interest rates on 5-year fixed income at 2%, it's very likely priced at something like 120 cents on the dollar, so you'd pay $1200 for each $1000 bond - that is, you'll pay $1200 for it today, collect 7% interest on the $1000 face value, watch it decline in value, and in 4 years get $1000 back.
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Old 09-23-2019, 02:40 PM   #4
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You may want to check if it is callable and if so, get the yield to call also
(YTC) as well as the YTM.
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Old 09-23-2019, 02:44 PM   #5
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kaneohe...

Quote:
Originally Posted by DenverCraig View Post
It has a maturity date of 8/1/2023, a AA rating, not callable.
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Old 09-23-2019, 02:46 PM   #6
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The guys on the Schwab bond desk are quite good. I would start by talking to your rep with questions, then ask him/her for the bond desk phone number.
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Old 09-23-2019, 04:18 PM   #7
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Bonds, in concept very easy to understand. Interest rates rise, bond value falls, etc.

Hard part is, to buy and sell in the secondary market. Better the rates, higher the rate of default. Bond funds, value is always changing. Individual bonds, may be more difficult to sell. etc.

Which is why, I stick to CD's. Find the base rates, nationwide.
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Old 09-23-2019, 04:35 PM   #8
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Quote:
Originally Posted by wolf View Post
Bonds, in concept very easy to understand. Interest rates rise, bond value falls, etc.

Hard part is, to buy and sell in the secondary market. Better the rates, higher the rate of default. Bond funds, value is always changing. Individual bonds, may be more difficult to sell. etc.

Which is why, I stick to CD's. Find the base rates, nationwide.
You are generalizing and it's really not the case with the municipal bond market. Defaults are very rare and the default rates are extremely low. It is true that municipalities which are riskier credits do pay more, however, even so, the default rates are low - significantly lower than corporates.

https://www.vaneck.com/blogs/muni-na...ity/?vecs=true

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The five-year all-rated cumulative default rate (CDR) on municipal bonds throughout the study period (1970-2017) remained quite low, at just 0.09%, especially when compared to the 6.7% CDR of global corporates over the same time period. In this context, it is perhaps unsurprising that even in a year with a relatively elevated number of defaults, there were only ten in all of 2017 out of many thousands of issues.
Understand that 0.09% cumulative default rate is 9 out of every 10,000 issues. I would contend that someone who knew absolutely nothing about municipal bonds, and simply purchased Moody's/S&P A-rated (or better) issues would find it virtually impossible to acquire one which will default.
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Old 09-23-2019, 04:38 PM   #9
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I spent most of the past 15 years buying individual bonds, both muni and corporate. I've been transitioning away from them and buying ETFs instead. I grew tired of the research needed when I had new money to invest, and the tax complexity. Individual bonds can be more difficult to sell, although not lately.

Anyway, to satisfy curiosity, I did a search for the bond at Schwab. I couldn't find any from the issuer with a coupon of 7%. However, those that were available have a YTM of 1.2% to 1.5%, as you might expect, with coupons of 3% to 5%. So, no, you're not really getting anywhere near the coupon rate if you hold until maturity. And the closer those get to maturity, the more the price will drop closer to par value.
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Old 09-23-2019, 05:14 PM   #10
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Thanks for all the info. Oddly, I just looked for the bond again on Schwab and couldn't find it, but I saved the search results in Excel, so here's the details:

ActionStateS&P RatingMoody's RatingDescriptionCouponMaturityCallableTaxableQuoteQtyPriceMinMaxYTMYTW2Accrued InterestEstimated Total
BuyTXAANRHarris County Texas GO 7% 08/01/2022, 41422TDP278/1/2022NoNoAsk10116.28410101.173--221.6711,850.07
BuyTXAANRHarris County Texas GO 7% 08/01/2023, 41422TDQ078/1/2023NoNoAsk10121.00610101.378--221.6712,322.27
BuyTXAANRHarris County Texas GO 7% 08/01/2024, 41422TDR878/1/2024NoNoAsk10126.76710101.289--221.6712,898.37

I understand now that the coupon rate is not what my return is going to be, thank you for that clarification. I'll get with my Schwab adviser, start the discussion and then probably start buying CD's.


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Old 09-23-2019, 05:17 PM   #11
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Quote:
Originally Posted by wolf View Post
Bonds, in concept very easy to understand. Interest rates rise, bond value falls, etc.

Hard part is, to buy and sell in the secondary market. Better the rates, higher the rate of default. Bond funds, value is always changing. Individual bonds, may be more difficult to sell. etc.

Which is why, I stick to CD's. Find the base rates, nationwide.
Way too generic an answer.
I use Fidelity and have had zero problems buying or selling in the secondary market. I have never, over hundreds of bonds, had one default.
If held to maturity, a quality bond will usually outperform a CD.
CD’s are also not appropriate for some in a taxable account.
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Old 09-23-2019, 05:19 PM   #12
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Originally Posted by DenverCraig View Post
Thanks for all the info. Oddly, I just looked for the bond again on Schwab and couldn't find it, but I saved the search results in Excel, so here's the details:

ActionStateS&P RatingMoody's RatingDescriptionCouponMaturityCallableTaxableQuoteQtyPriceMinMaxYTMYTW2Accrued InterestEstimated Total
BuyTXAANRHarris County Texas GO 7% 08/01/2022, 41422TDP278/1/2022NoNoAsk10116.28410101.173--221.6711,850.07
BuyTXAANRHarris County Texas GO 7% 08/01/2023, 41422TDQ078/1/2023NoNoAsk10121.00610101.378--221.6712,322.27
BuyTXAANRHarris County Texas GO 7% 08/01/2024, 41422TDR878/1/2024NoNoAsk10126.76710101.289--221.6712,898.37

I understand now that the coupon rate is not what my return is going to be, thank you for that clarification. I'll get with my Schwab adviser, start the discussion and then probably start buying CD's.


DC
Your yield on that bond if it were still available would have actually been 1.378%. Which sort of sucks.
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Old 09-23-2019, 05:24 PM   #13
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Originally Posted by DenverCraig View Post
... I understand now that the coupon rate is not what my return is going to be, thank you for that clarification. I'll get with my Schwab adviser, start the discussion and then probably start buying CD's.
Well, if your tax situation is such that tax-exempts are desirable, you should probably push a little harder to get comfortable with them. Remember, too, that Treasury bills, notes, and bonds are state tax exempt. Whatever you're comparing, be sure to use the net dollars in your pocket after tax to compare yields.

It is not uncommon for people to be so delighted by the idea of a tax-free bond that they end up with less money than they would have gotten from buying a taxable bond and paying tax on the interest.
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Old 09-23-2019, 06:39 PM   #14
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It's a hot market for bonds right now. When I was buying individual munis around the time of the financial crisis, I was picking up coupons of 4% to 5% easy, all below par. Those were sweet times. They are not so sweet now, as your above spreadsheet shows.
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Old 09-23-2019, 07:31 PM   #15
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It's a hot market for bonds right now. When I was buying individual munis around the time of the financial crisis, I was picking up coupons of 4% to 5% easy, all below par. Those were sweet times. They are not so sweet now, as your above spreadsheet shows.
Thatís why ladders are good. Forces reinvestment when who knows the future. I was buying long bonds a few years ago when prevailing wisdom said rates are going up. Happy to have those now.
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