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scrabbler1 · 10-27-2013, 10:29 PM

Another risk, perhaps small, with buying individual bonds is that they are sometimes callable. That is, the bond issuer may choose to redeem them early, before their maturity date. My friend, the one I have described in some other threads who had a large inheritance last year, received several bonds in his share of a brokerage account. One of them got called early by several years. It was a nice bond, paying 4% or 5%, so he would not be collecting those interest payments every 6 months. Instead, he received this big (i.e. par, it did not matter what its current market value was) principal amount which we had to figure out what to do with. We had already set up some bond funds to accumulate the cash his brokerage account was throwing off every month (from other bonds and stocks) and cash which was part of the inheritance, so we put it in there, maintaining his previous AA. But there was no real chance we could get the same rate of return the bond had been generating.

Gatordoc50 · 10-29-2013, 10:48 AM

Quote:

Originally Posted by scrabbler1

Exactly! I have been investing in bond funds since 1990 and I was always in them for the income. It is no different from investing in a bond in that respect because all you expect to do with an individual bond is to get your exact principal back. I have made very few redemptions of my shares of bond funds in the last 23 years. Some of them I made a small profit, some others I had a small loss. No big deal.

My ER right now is being financed by the monthly dividends I get from a bond fund. If the NAV of the bond fund drops so its monthly income will eventually rise (as was the case a few years ago), then I am all for it.

If you're not worried about NAV fluctuations, why not just invest in a dividend ETF or fund for income. The income would gain favorable tax treatment and there may be more of a chance for price appreciation. That's what I don't understand.

scrabbler1 · 10-29-2013, 11:12 AM

Quote:

Originally Posted by Gatordoc50

If you're not worried about NAV fluctuations, why not just invest in a dividend ETF or fund for income. The income would gain favorable tax treatment and there may be more of a chance for price appreciation. That's what I don't understand.

I am also in a stock mutual fund which pays quarterly dividends. However, the dividends as a percent of my money invested is far lower and far more erratic than the far more stable monthly dividends from my bond funds. The stock fund has a growth element in it which is why am in it to begin with.

brewer12345 · 10-29-2013, 12:29 PM

Quote:

Originally Posted by scrabbler1

Another risk, perhaps small, with buying individual bonds is that they are sometimes callable. That is, the bond issuer may choose to redeem them early, before their maturity date. My friend, the one I have described in some other threads who had a large inheritance last year, received several bonds in his share of a brokerage account. One of them got called early by several years. It was a nice bond, paying 4% or 5%, so he would not be collecting those interest payments every 6 months. Instead, he received this big (i.e. par, it did not matter what its current market value was) principal amount which we had to figure out what to do with. We had already set up some bond funds to accumulate the cash his brokerage account was throwing off every month (from other bonds and stocks) and cash which was part of the inheritance, so we put it in there, maintaining his previous AA. But there was no real chance we could get the same rate of return the bond had been generating.

Since my idea of prudent bond investing is to buy junk at a discount to par, I am usually pounding the table and hooting when my bonds get called.

bmcgonig · 10-29-2013, 10:08 PM

Quote:

Originally Posted by pb4uski

+1 which is why I went with the Guggenheim Bulletshares - I give up 24 bps but they do the picking.

Pb, i have a question about those bonds. If I buy the 2016s today, trading for 22.30 do I get back only 20 when everything matures in 2016?

Thanks

pb4uski · 10-30-2013, 07:23 AM

Probably in the range of 20. The 2011 and 2012 Corporate Series paid a bit over 20 as a return of investment in their final distributions (see ETFs | Guggenheim Investments). Also, the 2013 Corporate series seems to be on track to do so as well (see the pdf on the maturity process on this page ETFs | Guggenheim Investments).

The way I look at it the 2.24 of the 2.30 is a premium to reflect that current portfolio yields are lower than the portfolio coupon and the .06 premium is similar to a commission. I focus on the YTW after considering the effect of the premiuum over the NAV shown on ETFs | Guggenheim Investments. It currently indicates that the YTW for the 2016 series would be ~.84% so if I was going that short I would probably go with a 3 year CD or an online savings account.

My time horizon is longer with the 2019 and 2020 series and at the time I bought them the YTW was better than CDs with a similar maturity.

YMMV and you could also address your questions to Guggenheim. I found them to be pretty responsive when I corresponded with them prior to purchasing.

Ready · 10-30-2013, 10:00 AM

Have you looked at any of the other bond funds with fixed maturity dates, like the Fidelity Municipal Income 2019 fund (FMCFX)? Does Vanguard have any fixed maturity bond funds?

pb4uski · 10-30-2013, 10:17 AM

No, munis make no sense for me given my low tax bracket in ER. Vanguard does not have any target date maturity bond funds. For corporate and high yield bonds, Guggenheim was the only provider when I bought mine, but I think Ishares has come out with an ETF in the last six months.