# Focused Bond, Bond Mutual Fund, And Bond ETF Questions

#### clobber

##### Recycles dryer sheets
My demonstrated lack of knowledge in bonds has led me to try and understand - plus I'm looking for a place to put some money. So much expertise in these forums, I'm hoping you can help. I'm using my TD account to make some observations.

Individual Bonds - reasonably easy to understand in theory, but getting bogged down in specifics. I will use CIUSP 05531FAV5 for reference (no good reason)

1) It seems most bonds have a par value of \$1000, but I read that some do not. How do I know the par value? I see nothing on my TD screen for that bond that says the par value. I guess I can infer from a "Call Sched" that says "04-09-2021@100.000 0.560." I guess the par value is 10x100=1000, but shouldn't it be explicitly stated if not all bonds are par 1000?

2) Why on earth is the price of a bond an order of magnitude less than par? (e.g. \$103 when it will really cost you \$1030). That is not done with stocks - the price of a share is the price of a share.

3) Price of bond changes with interest rates etc. Where can I find of graph of the price for 05531FAV5? Since this is so hard to find (I have not), I assume it must somehow not be important?

4) How do I measure liquidity of a bond? For a stock, I know that I can sell GE, AMZN, or TSLA immediately if I want. I'm not sure how I know that, but I do. There are other stocks that are not like that, but I stay away. How do I know that I can quickly sell an individual bond? For 05531FAV5, TD is showing me that a small "depth of market" table with two rows. One for quantity 21 at price X and one for quantity 100 at price Y. Does that mean in the entire world there are only quantity 121 for sale and it is not very liquid? Could I get stuck not being able to sell these bonds?

5) If I buy a bond and hold it until maturity, is the par value (\$1000) just dumped into my account or do I have to somehow redeem it?

6) As I understand it, all bond interest payments are taxed at your normal income rate? There is no equivalent of "qualified" dividends in the equities world?

7) As far as estimating income, do I care most about the current yield, yield to maturity, or yield to worst. That is, how much exactly are the interest payments going to be?

Bonds Funds and ETFs

1) When I look at available bonds from TDAmeritrade, everything short term is very low yield. Like the absolute highest is 1.87% for something in the 1-3 year range. So how is something like VFSUX quoting a yield of 2.82%? And that yield is on what - the amount I bought or some underlying par value?

2) I do not understand how I am supposed to know if an individual Fund or ETF is trading at a discount or premium. Again using VSFUX, current price is \$10.75. If I actually buy that fund, do I pay 10 times that per share (\$107.5) like I would with an individual bond? I'm guessing not. Now, I understand that the discount/premium would be calculated based on the NAV. Fine, I have the NAV - but how do I get the numerator to know? Or am I just assuming for some reason that anything above \$10 is a premium?

Bonds vs Bond Funds

If individual bonds effectively have a guaranteed return of principal (except for default), why buy funds and ETFs?

Yikes. Told you I did not understand.

I am a muni bond guy so my answers will pertain to that class of bonds.

Par for most bonds is \$1000. You take the quoted price x 10 plus commission, plus any accumulated interest and that is your total cost.

Bonds can trade at a premium or a discount. That should be evident in the ask quote.

You can use https://emma.msrb.org/ to see a history/chart of a bonds price over time. It will also list all the material events for a bond and the financials

At maturity the par value will be deposited into your account. There is no need to redeem. Same holds true for interest payments.

You should always evaluate a bond at yield to worst which takes into account an early call date. Yield or yield to maturity are secondary.

Liquidity for a bond is going to be based on if there is a bid. Most muni’s never have a bid, but if I want to sell, which is rare, I can request a bid from Fidelity and usually within an hour or two I have several bids and the bond is sold. It’s pretty simple.

Lastly I do not use bond funds because I like the precision of creating a ladder to fund specific years of income. I also like that a bond returns to par whereas a fund has no par or maturity date and thus if rates rise, you could see a loss in NAV.

I probably missed a question or two in there, but I hope this helps.

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You can use https://emma.msrb.org/ to see a history/chart of a bonds price over time. It will also list all the material events for a bond and the financials

I probably missed a question or two in there, but I hope this helps.

It does help. Thanks.

I got that CUISP directly from a particular bond on the TD website. However, it does not show up on the website you linked. Hmm...

It does help. Thanks.

I got that CUISP directly from a particular bond on the TD website. However, it does not show up on the website you linked. Hmm...

I just looked up your bond. It’s a Corp bond. EMMA is for muni’s only.

The YTW for your bond listed is .735%. Not so good.

Many bonds do not have a guaranteed return of principal. Depending on the bond there is default risk, the higher the quality, the lower the risk.

Government-backed bonds are the only "guaranteed" ones.

The only other thing I will add is you should really build a ladder. Buying a bond or two doesn’t hurt, but you can’t take advantage of longer durations or changes in rates, not to mention lack diversification.

Fidelity has some really good bond tools and articles on how to build a ladder. They will also build a ladder for you, charging only a \$1 per \$1000 bond.

https://www.fidelity.com/fixed-income-bonds/fixed-income-tools-services/overview

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A good chart showing historic default rates at different levels of quality. Corporates in general are the most likely to default.

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No, this is a corporate:
Bonds Detail

OP - Mallinckrodt is a company in trouble. The pricing of the bond at 30 cents on the dollar should tell you that it is extremely high risk. The Moody's/S&P ratings of Ca/B+ should further solidify the extremely high level of risk.

The bonds are unsecured, so in the event of bankruptcy, you'll likely receive nothing. If you do have particular knowledge of the company, are confident they will not end up in bankruptcy, and will make good on interest and redemption in two years, then you might want to nibble on some - but be sure that whatever you buy, you are willing to lose it all.

I've only looked in to this specific bond very quickly, but from what I see, it was part of an exchange offer in November, where the company paid \$475/bond:

https://www.prnewswire.com/news-rel...fers-and-consent-solicitations-300951289.html

https://www.sec.gov/Archives/edgar/data/1567892/000156789219000064/mnkexhibit9911252019.htm

I think you input a different ciusp than the OP listed.

I think you input a different ciusp than the OP listed.

Yes - somehow copy/paste/search messed up. Thanks.

Many bonds do not have a guaranteed return of principal. Depending on the bond there is default risk, the higher the quality, the lower the risk.

Government-backed bonds are the only "guaranteed" ones.

Yes, understand that. I was making an assumption.

My demonstrated lack of knowledge in bonds has led me to try and understand - plus I'm looking for a place to put some money. So much expertise in these forums, I'm hoping you can help. I'm using my TD account to make some observations.

Individual Bonds - reasonably easy to understand in theory, but getting bogged down in specifics. I will use CIUSP 05531FAV5 for reference (no good reason)

1) It seems most bonds have a par value of \$1000, but I read that some do not. How do I know the par value? I see nothing on my TD screen for that bond that says the par value. I guess I can infer from a "Call Sched" that says "04-09-2021@100.000 0.560." I guess the par value is 10x100=1000, but shouldn't it be explicitly stated if not all bonds are par 1000?

Most bonds have a par of 1000 per bond. When they do not, it will usually be explicitly stated. An easy way to spot check is if you are buying 10 bonds and the quote is 101, the price should be about \$10,100 plus accrued interest and broker fees. The call sched info you posted means that the bond is calable on 4/9/21 at 100 cents on the dollar (1000 per bond) and the yield to call is 0.56%. So if the issuer calls it as scheduled, you would earn a bit more than half a percent annually.

2) Why on earth is the price of a bond an order of magnitude less than par? (e.g. \$103 when it will really cost you \$1030). That is not done with stocks - the price of a share is the price of a share.

Bond pricing convention is quoted as a percentage of par. So if par is \$1000 and you are quoted 101, the bond trades at \$1010 per bond.

3) Price of bond changes with interest rates etc. Where can I find of graph of the price for 05531FAV5? Since this is so hard to find (I have not), I assume it must somehow not be important?

You can search on a cusip or an issuer here for market data: Bonds Home TRACE shows trades for corporates, munis, treasuries and other bonds.

4) How do I measure liquidity of a bond? For a stock, I know that I can sell GE, AMZN, or TSLA immediately if I want. I'm not sure how I know that, but I do. There are other stocks that are not like that, but I stay away. How do I know that I can quickly sell an individual bond? For 05531FAV5, TD is showing me that a small "depth of market" table with two rows. One for quantity 21 at price X and one for quantity 100 at price Y. Does that mean in the entire world there are only quantity 121 for sale and it is not very liquid? Could I get stuck not being able to sell these bonds?

As a rule of thumb, the bigger the issue (amount of the specific bond you are interested in) outstanding, the more liquid it is. If you look at the trade history of your CUSIP on TRACE, you will get an idea of how liquid a bond is.
Some are extremely liquid, others trade by appointment. Be aware that the junkier the bond, the more illiquid they become in times of market stress.

5) If I buy a bond and hold it until maturity, is the par value (\$1000) just dumped into my account or do I have to somehow redeem it?

Yes, maturing bonds just show up as cash in your account on maturity day absent default.

6) As I understand it, all bond interest payments are taxed at your normal income rate? There is no equivalent of "qualified" dividends in the equities world?

Correct, with an exception. If you are willing to play in the somewhat junky and risky world of preferred stocks, they act much like long dated bonds but many receive tax treatment like equities.

7) As far as estimating income, do I care most about the current yield, yield to maturity, or yield to worst. That is, how much exactly are the interest payments going to be?

Always look at yield to worst. That will take into account the cash coupons you receive plus or minus any discount/premium that accrues as the bond grinds towards maturity or call date.

Bonds Funds and ETFs

1) When I look at available bonds from TDAmeritrade, everything short term is very low yield. Like the absolute highest is 1.87% for something in the 1-3 year range. So how is something like VFSUX quoting a yield of 2.82%? And that yield is on what - the amount I bought or some underlying par value?

The bond world is set up for institutional investors. Retail investors generally get the scraps and pay up for them. The exceptions are treasuries at auction, newly issued bonds if your broker offers you access to them (Schwab does), and deeply discounted/distressed names where giving up a point makes little difference to your potential return.

2) I do not understand how I am supposed to know if an individual Fund or ETF is trading at a discount or premium. Again using VSFUX, current price is \$10.75. If I actually buy that fund, do I pay 10 times that per share (\$107.5) like I would with an individual bond? I'm guessing not. Now, I understand that the discount/premium would be calculated based on the NAV. Fine, I have the NAV - but how do I get the numerator to know? Or am I just assuming for some reason that anything above \$10 is a premium?

You have to go to the fund sponsor's website. Then you care about two numbers: is the fund trading at a premium to net asset value (NAV)? are the bonds in the fund trading at a premium to par?

Bonds vs Bond Funds

If individual bonds effectively have a guaranteed return of principal (except for default), why buy funds and ETFs?

Funds and ETFs offer you instant diversification (very important in bonds), access to bonds you personally cannot access (non-registered bonds), and potentially the benefits of professional analysis. You also get to access the better economics the bond market reserves for institutional investors.

Yikes. Told you I did not understand.

My responses in bold above.

Yes - somehow copy/paste/search messed up. Thanks.

Okay. Yes - that was a different CUISP.

Im actually not looking at any specific bond and was just using that one for an example. To help answer my questions using specifics.

I've only bought a few bonds, and mostly it was a learning experience, even had to phone the brokerage afterwards to ensure I didn't accidentally buy \$1,000,000 worth of bonds

I have different brokerages, and each presents the purchase of a bond pricing slightly differently which made it more confusing for me. It's been months, so I forget which was the worst.

... If individual bonds effectively have a guaranteed return of principal (except for default), why buy funds and ETFs? ...
As @brewer12345 pointed out, the issue is diversification.

I am on the investment committee of a nonprofit where our policy is to buy individual (US-only) bonds, using bond funds only as very short-term parking places. Our individual bond positions are almost always \$10,000 and the portfolio is analyzed to prevent sector concentrations. So for each million bucks, we are holding almost 100 different issues. In addition to diversification, this allow us to micromanage maturities to meet our needs. This is one of the ways our FA earns his money, selecting and monitoring all our bond positions. I guess you could consider it to be a home-made bond fund.

So as an individual, how many issues do you need to have in order to have "reasonable" diversification? There is no magic number. "Lots of them," of course. In stocks, the minimum number for diversification is often given in the 60-100 range. That's why most of us buy equity funds that give us diversification that we aren't capable/willing to manage on our own. Google can probably find you some discussion about bond diversification.

The exception is US government issues, where risk is considered to be zero and hence diversification among issuers is not necessary. For regular govvies you start by thinking about a few issues in a bond ladder. For TIPS IMO ladders are not necessary (though this is probably a minority opinion) because there is really little or no yield curve. Another minority opinion: There's no reason to pay a guy in a suit to select govvies. A brain-dead monkey could do it and he will work for peanuts. So no govvie mutual funds for us.

For non-treasury bonds, I will generally buy 10 or 20k pieces in order to get acceptable pricing. I usually do some credit analysis prior to purchase, with the amount of digging increasing the junkier the issuer and the longer the maturity. I have mostly been buying stuff inside of 4 months from highly rated issuers, so the amount of credit analysis I have been doing is modest (these are A and AA rated munis, so read the rating agency report and consider the issuer and its place in the world). I have and do buy junk when I find attractive stuff (not a lot out there right now) and when I do so I will ordinarily do a fairly extensive amount of research and financial modelling. I bought a small lot of a single junk issuer this year and before doing so I evaluated the market value and earnings power of the bond collateral assets and reviewed the issuer as a whole. The bonds were trading around the liquidation value of the collateral pool and the subject assets are currently generating a lot of cash, so I figured I was OK buying a small amount at a double digit yield.

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