Fixed Income Investing II

[Montecfo]

This may not apply to you but recent postings on deducting prepaid interest on secondary bond purchases looks like worthy of a column. I recently had to manually review all my 2022 bond purchases to capture the prepaid interest on purchases so I could amend 2022 fed return

Yes. Do not want to miss deducting that.

 

[Texas Proud]

I am with Schwab and each CUSIP includes Moody's and S&P ratings and that is what I use.

I don't have any NR... I'm not that adventurous I guess. I do a quailty distribution and and look at cumulative percentages for A or better (high quality to me) and BBB- or better (investment grade).

Quality Quality Distribution

FDIC 40.7% 40.7%

AAA 0.0% 40.7%

AA+ 37.7% 78.4%

A+ 3.9% 82.3%

A 7.7% 90.0%

A- 3.9% 93.9%

BBB+ 2.6% 96.4%

BBB 2.3% 98.7%

BBB- 0.0% 98.7%

BB+ 1.3% 100.0%

BB 0.0% 100.0%

BB- 0.0% 100.0%

CCC+ or lower 0.0% 100.0%

100.0%

I have bought preferred shares and a number of them do not have any rating... either at Schwab or Quantum online... and the few I have tied to add to Fidos income analyzer said they did not recognize them...



I was going to spend time looking to see if they have bonds and guess a rating but the couple I have looked at did not have any debt...


Except for one A my highest rating is BBB+. But I do like NSS that is paying very well but rated only B...

 

[nwsteve]

I don't see any need for that... it is effectively captured in YTM and is simply an adjustment of the first coupon that I receive for the period of time that I didn't own it. Below is an example with a 5%, 5 year bond... bought at issue or bought pat way through the first coupon period. I'm not going to sweat the 1bp difference.

	5.06%	5.05%
12/31/22	-10,000
03/31/23		-10,125
06/30/23	250	250
12/31/23	250	250
06/30/24	250	250
12/31/24	250	250
06/30/25	250	250
12/31/25	250	250
06/30/26	250	250
12/31/26	250	250
06/30/27	250	250
12/31/27	10,250	10,250

If most of your purchases are new issue, no prepaid to speak of. I had over 2150 of prepaid $$, that I had failed to deduct from 2022 return--worth over 450

 

[Texas Proud]

If most of your purchases are new issue, no prepaid to speak of. I had over 2150 of prepaid $$, that I had failed to deduct from 2022 return--worth over 450

Should that not be identified to you by the broker?


I just bought my first bond in a taxable account so hope they report it correctly.

 

[Montecfo]

Should that not be identified to you by the broker?


I just bought my first bond in a taxable account so hope they report it correctly.

Should but no requirement to report it. My broker did not report it. I think I may have been one of the ones alerting people.

ETA: and if you bought a bond later in the year it may become a carryover to deduct the following year.

 

[Weathering]

Should but no requirement to report it. My broker did not report it. I think I may have been one of the ones alerting people.

As an example, Vanguard reports it to customers as information helpful for filing taxes, but doesn’t provide anything about where to put it on tax forms. That is fine with me - I just need the values and it’s nice they name the bond. Vanguard provides individual values for accrued interest on purchased taxable bonds, treasury bonds, and municipal bonds.

 

[Montecfo]

As an example, Vanguard reports it to customers as information helpful for filing taxes, but doesn’t provide anything about where to put it on tax forms. That is fine with me - I just need the values and it’s nice they name the bond. Vanguard provides individual values for accrued interest on purchased taxable bonds, treasury bonds, and municipal bonds.

Or what year's tax return it goes on!

 

[pb4uski]

If most of your purchases are new issue, no prepaid to speak of. I had over 2150 of prepaid $$, that I had failed to deduct from 2022 return--worth over 450

Yeah but that's more a tax reporting issue and doesn't impact YTM, which is what I am focused on.

 

[Weathering]

Or what year's tax return it goes on!

Yikes! I’ll need to look into the “which tax year” more closely before doing 2023 taxes.

 

[imbatman]

Yeah the whole "deduct it yourself" and "remember yourself if you got your first interest payment yet" issues have really made me raise the bar a little on when I bite in secondary.....or at least trying to focus on non-taxable accounts for secondary purchase.

 

[Echard]

oh crap, another tax issue I hadn't looked at. Can someone explain the prepaid interest like I'm 5? Wouldn't that prepaid interest just be part of the cost basis when the bond matures, or you sell it in the secondary market? Why worry about it in the year you bought it? Just because you can deduct it years earlier?

 

[imbatman]

This only applies if you BOUGHT in secondary, and you pre-paid interest to the seller for what had accrued prior to your purchase. Unfortunately, when this is paid to you later on the next coupon date, your broker will report ALL of that interest to the IRS as yours, so you need to deduct what was prepaid so you don't pay taxes on something you didn't actually earn. Other complication is if your first interest payment occurs in the next tax year (you can only fix this in the tax year in which it is taxed).

Basically, this is a one time problem with the purchase transaction.

 

[Montecfo]

oh crap, another tax issue I hadn't looked at. Can someone explain the prepaid interest like I'm 5? Wouldn't that prepaid interest just be part of the cost basis when the bond matures, or you sell it in the secondary market? Why worry about it in the year you bought it? Just because you can deduct it years earlier?

Imbatman did a good job of explaining this.

The prepaid interest does not become part of your basis. You cannot choose when to deduct it. It is deductible against your first interest payment on the bond in question.

That will be in the year you purchased the bond or the following year.

In my case I bought quite a few bonds on the secondary market over the past couple of years. Had I not captured and deducted the prepaid interest I would have overpaid taxes quite a bit.

But it is not hard to do correctly.

 

[rkser]

How bad is the total return on VGSH when compared to buying individual Treasuries/ Bonds & be continuously involved in buying & selling ?



Thanks

 

[COcheesehead]

How bad is the total return on VGSH when compared to buying individual Treasuries/ Bonds & be continuously involved in buying & selling ?



Thanks

If you ladder bonds, there is no need to sell.
The current distribution on VGSH is .17 cents on 57.61 NAV = 3.5% annualized - well below what you can get in individual bonds.

 

[Montecfo]

If you ladder bonds, there is no need to sell.
The current distribution on VGSH is .17 cents on 57.61 NAV = 3.5% annualized - well below what you can get in individual bonds.

SEC yield is 5.01%. This gets into the total return vs coupon discussion.

I do not favor this particular investment but as a total return investor I am not deterred by trailing yields.

You can automate some of your purchasing depending on what you are trying to do. Also as stated, a ladder once built is not hard to maintain.

And bonds can be a bit of a pain to sell. So some change of mindset.

 

[COcheesehead]

SEC yield is 5.01%. This gets into the total return vs coupon discussion.

I do not favor this particular investment but as a total return investor I am not deterred by trailing yields.

You can automate some of your purchasing depending on what you are trying to do. Also as stated, a ladder once built is not hard to maintain.

And bonds can be a bit of a pain to sell. So some change of mindset.

SEC yield is somewhat useless. The yield I calculated is reality as of right now.

 

[Montecfo]

SEC yield is somewhat useless.

To someone committed to living off the coupon, yes. But distribution yield is backward looking and does not tell the full story.

I find both measures to be useful tools.

 

[COcheesehead]

To someone committed to living off the coupon, yes. But distribution yield is backward looking and does not tell the full story.

I find both measures to be useful tools.

I won’t push the topic further, but when one is comparing a fund to a bond, a 5% treasury pays me 5%. The fund in question pays me 3.5%.

 

[Montecfo]

I won’t push the topic further, but when one is comparing a fund to a bond, a 5% treasury pays me 5%. The fund in question pays me 3.5%.

I get why you would. And I am not buying this ETF either.

But from the OPs viewpoint we should say thatcomparing a single security purchased today to a fund of hundreds of securities with 1-3 years' duration is comparing apples to oranges. If you built a portfolio of comparable securities over the same time period it would have the same characteristics as this fund does.

The aggregate coupon of such a portfolio would trail that of recent purchases in a rising rate environment. Your individual bond purchases do this now. Everyone's do. But the aggregate coupon of your portfolio would be rising as it is for this fund, unlike that of a single bond which would be unchanged.

Not trying to convince you to buy it, just trying to sharpen the contrast a bit.

 

[imbatman]

Yup it seems many feel better holding their own selected bonds (which have likely gone down in today's "market value") that they plan to hold to maturity.....than to have just dumped it all into an ETF/fund of bonds at the same time, which also has a price/ value that will have dropped. Bottom line is if you need the money TODAY, whether you buys bonds yourself or in a fund, most likely you are eating a loss (how big depends on your duration and yield). I do appreciate that I basically pay little / no expense choosing my own bonds, but I do instead pay in spending my time.........

I think all these investments have their purpose for different people.

 

[COcheesehead]

Yup it seems many feel better holding their own selected bonds (which have likely gone down in today's "market value") that they plan to hold to maturity.....than to have just dumped it all into an ETF/fund of bonds at the same time, which also has a price/ value that will have dropped. Bottom line is if you need the money TODAY, whether you buys bonds yourself or in a fund, most likely you are eating a loss (how big depends on your duration and yield). I do appreciate that I basically pay little / no expense choosing my own bonds, but I do instead pay in spending my time.........

I think all these investments have their purpose for different people.

Don’t forget the key difference, the individual bond holder knows exactly how much and when they will be back to their original purchase amount.

 

[finvest2]

How are people looking at risk in corporate bonds? Maybe someone can help me out with understanding the risk between two bonds that I saw mentioned on another thread (CUSIP 46625HJM3 and 48130CBN4).

46625HJM3 from JPM: it is rated BBB+ and has 'subordinated' debt.
48130CBN4 from JPM it is rated A- and has 'senior unsecured' debt.

If I understand this correctly JPM is issuing various levels of debt so that in the case of some form of insolvency they can determine who gets paid back in what order based on the tiers of debt that they offer. eg 'senior unsecured' debt gets paid before 'unsubordinated' debt.

What does the kind of insolvency that leads to not paying unsubordinated debt look like? Does JPM actually have to be in trouble, or does whatever debt is wrapped up in these bonds need to be in trouble (I'm thinking of mortage bonds circa 2008)

Basically my question in: going on the idea that the US Govt wouldn't actually let JPM fail, is there a reason to not buy the lowest grade stuff that they're selling?

 

[COcheesehead]

How are people looking at risk in corporate bonds? Maybe someone can help me out with understanding the risk between two bonds that I saw mentioned on another thread (CUSIP 46625HJM3 and 48130CBN4).

46625HJM3 from JPM: it is rated BBB+ and has 'subordinated' debt.
48130CBN4 from JPM it is rated A- and has 'senior unsecured' debt.

If I understand this correctly JPM is issuing various levels of debt so that in the case of some form of insolvency they can determine who gets paid back in what order based on the tiers of debt that they offer. eg 'senior unsecured' debt gets paid before 'unsubordinated' debt.

What does the kind of insolvency that leads to not paying unsubordinated debt look like? Does JPM actually have to be in trouble, or does whatever debt is wrapped up in these bonds need to be in trouble (I'm thinking of mortage bonds circa 2008)

Basically my question in: going on the idea that the US Govt wouldn't actually let JPM fail, is there a reason to not buy the lowest grade stuff that they're selling?

A bailout doesn’t guarantee bond holders are made whole or get anything at all. That is what risk is and why you are paid more to take it. Read the Moody’s reports. They are usually interesting.

 

[Echard]

This only applies if you BOUGHT in secondary, and you pre-paid interest to the seller for what had accrued prior to your purchase. Unfortunately, when this is paid to you later on the next coupon date, your broker will report ALL of that interest to the IRS as yours, so you need to deduct what was prepaid so you don't pay taxes on something you didn't actually earn. Other complication is if your first interest payment occurs in the next tax year (you can only fix this in the tax year in which it is taxed).

Basically, this is a one time problem with the purchase transaction.

Ah, got it. This is super helpful. Thank you so much. So of the first payment rolls over into the next year, you have to look at your tax form from the previous year for the prepaid interest?

Also, does TurboTax deal with this? I’m pretty sure my accountant has never caught this.