Ridiculous CD rates - where now

[dixter]

dixter... have you ever bought a bond?

In the example that you cite you don't get 9% on your investment... if the yield is lower than the coupon you pay a premium so your return is the yield to maturity unless interest rates change.

The only time the yield comes into play is when/if you sell a bond or it matures..

If you buy a bond and its face value is above par (par=$1000) and you sell it before it matures the yield is determined at that time of sell... if you sell the bond above what your original cost was then your yield is better, but even if you sell at what you paid for it you still got the 9% coupon... the coupon rate doesn't change over the life of the bond...

remember you have 9% coupon AND potential yield... and if you hold the bond to maturity then you get the face value back ($1000/bond)

There are no early withdraw penalties either... this isn't that hard...

 

[pb4uski]

dixter, you are confused. You say:

....if a bond is selling above prime value ( $1000 at prime ) then that only affects the yield when you sell the bond or it matures, it never ever affects the yield while you hold the bond and collect the coupons...

That is false.... not the way it works.

To begin with, bonds don't have a prime value... the $1,000 is par value. So let's say you have this mythical bond with a 30 year remaining term and a coupon of 9% and because interest rates are lower than when the bond was issued the value has increased and you need to pay $1,500 to acquire it.

In the first year, you receive interest of $90 ($1,000 par value * 9% coupon rate)... your yield is 5.54% [=RATE(30,90,-1500,1000)=5.54%]. The simple fact that in the first year you only receive $90 of interest on a $1,500 cash outlay/investment is proof positive that your return is less than 9%!

The only way you can achieve a yield of 9% is to buy the bond for par of $1,000, but because market interest rates are lower you have to pay more than $1,000 for a 9% coupon, and that extra $500 that you pay reduces the effective yield below 9% to 5.54%.

IRR	5.54%
0	-1,500
1	90
2	90
3	90
4	90
5	90
6	90
7	90
8	90
9	90
10	90
11	90
12	90
13	90
14	90
15	90
16	90
17	90
18	90
19	90
20	90
21	90
22	90
23	90
24	90
25	90
26	90
27	90
28	90
29	90
30	1,090

Math is hard dixter.

Bond Amortization Calculator
Bond Details		Rate	Years	No. payments	Amount
Bond details		9.00%	30	1	1,000.00
Bond Issue Price
Bond Issue price		5.54%			1,500.00
Premium					500.00
Effective Interest Method Amortization Schedule
Period	Opening	Interest	Payment	Closing	Premium
1	1,500.00	83.15	90.00	1,493.15	6.85
2	1,493.15	82.77	90.00	1,485.92	7.23
3	1,485.92	82.37	90.00	1,478.29	7.63
4	1,478.29	81.95	90.00	1,470.23	8.05
5	1,470.23	81.50	90.00	1,461.73	8.50
6	1,461.73	81.03	90.00	1,452.76	8.97
7	1,452.76	80.53	90.00	1,443.29	9.47
8	1,443.29	80.01	90.00	1,433.29	9.99
9	1,433.29	79.45	90.00	1,422.75	10.55
10	1,422.75	78.87	90.00	1,411.61	11.13
11	1,411.61	78.25	90.00	1,399.86	11.75
12	1,399.86	77.60	90.00	1,387.46	12.40
13	1,387.46	76.91	90.00	1,374.37	13.09
14	1,374.37	76.19	90.00	1,360.56	13.81
15	1,360.56	75.42	90.00	1,345.98	14.58
16	1,345.98	74.61	90.00	1,330.59	15.39
17	1,330.59	73.76	90.00	1,314.35	16.24
18	1,314.35	72.86	90.00	1,297.20	17.14
19	1,297.20	71.91	90.00	1,279.11	18.09
20	1,279.11	70.90	90.00	1,260.02	19.10
21	1,260.02	69.85	90.00	1,239.86	20.15
22	1,239.86	68.73	90.00	1,218.59	21.27
23	1,218.59	67.55	90.00	1,196.14	22.45
24	1,196.14	66.31	90.00	1,172.45	23.69
25	1,172.45	64.99	90.00	1,147.44	25.01
26	1,147.44	63.61	90.00	1,121.04	26.39
27	1,121.04	62.14	90.00	1,093.19	27.86
28	1,093.19	60.60	90.00	1,063.78	29.40
29	1,063.78	58.97	90.00	1,032.75	31.03
30	1,032.75	57.25	90.00	1,000.00	32.75

 

[jazz4cash]

you do know that you don't have to buy a bond for its yield at maturity right?

for example... you buy a bond that pays out 9% coupons for 30yrs... you keep the bond for say 20yrs and you collect the 9% coupon each year for the 20yrs and then you just sell the bond like you would a stock... you don't care what the yield to maturity is cause you won't own the bond at maturity...
You get the 9% each year and they don't charge you anything to have it year to year... and if you buy it today and don't like it or need the money next week you just sell it back and get your money back...

Yes I know, but I agree with PB4's analysis and comments. Many of us are in the same boat searching for CD alternatives and if anyone is unfamiliar with how bonds work your disregard for yield is misleading. By saying the yield doesn't matter, you are essentially saying the price paid doesn't matter. In fact the purchase price and the selling price (if you sell your 30 yr bond after 20 yrs) will make a huge impact on the yield of your bond.

 

[Golden sunsets]

Dixter has never calculated his return. He doesn't seem to understand that his 9% fat coupon is not his return.

 

[Dtail]

dixter, you are confused. You say: That is false.... not the way it works.

To begin with, bonds don't have a prime value... the $1,000 is par value. So let's say you have this mythical bond with a 30 year remaining term and a coupon of 9% and because interest rates are lower than when the bond was issued the value has increased and you need to pay $1,500 to acquire it.

In the first year, you receive interest of $90 ($1,000 par value * 9% coupon rate)... your yield is 5.54% [=RATE(30,90,-1500,1000)=5.54%]. The simple fact that in the first year you only receive $90 of interest on a $1,500 cash outlay/investment is proof positive that your return is less than 9%!

The only way you can achieve a yield of 9% is to buy the bond for par of $1,000, but because market interest rates are lower you have to pay more than $1,000 for a 9% coupon, and that extra $500 that you pay reduces the effective yield below 9% to 5.54%.

IRR	5.54%
0	-1,500
1	90
2	90
3	90
4	90
5	90
6	90
7	90
8	90
9	90
10	90
11	90
12	90
13	90
14	90
15	90
16	90
17	90
18	90
19	90
20	90
21	90
22	90
23	90
24	90
25	90
26	90
27	90
28	90
29	90
30	1,090

Math is hard dixter.

Bond Amortization Calculator
Bond Details		Rate	Years	No. payments	Amount
Bond details		9.00%	30	1	1,000.00
Bond Issue Price
Bond Issue price		5.54%			1,500.00
Premium					500.00
Effective Interest Method Amortization Schedule
Period	Opening	Interest	Payment	Closing	Premium
1	1,500.00	83.15	90.00	1,493.15	6.85
2	1,493.15	82.77	90.00	1,485.92	7.23
3	1,485.92	82.37	90.00	1,478.29	7.63
4	1,478.29	81.95	90.00	1,470.23	8.05
5	1,470.23	81.50	90.00	1,461.73	8.50
6	1,461.73	81.03	90.00	1,452.76	8.97
7	1,452.76	80.53	90.00	1,443.29	9.47
8	1,443.29	80.01	90.00	1,433.29	9.99
9	1,433.29	79.45	90.00	1,422.75	10.55
10	1,422.75	78.87	90.00	1,411.61	11.13
11	1,411.61	78.25	90.00	1,399.86	11.75
12	1,399.86	77.60	90.00	1,387.46	12.40
13	1,387.46	76.91	90.00	1,374.37	13.09
14	1,374.37	76.19	90.00	1,360.56	13.81
15	1,360.56	75.42	90.00	1,345.98	14.58
16	1,345.98	74.61	90.00	1,330.59	15.39
17	1,330.59	73.76	90.00	1,314.35	16.24
18	1,314.35	72.86	90.00	1,297.20	17.14
19	1,297.20	71.91	90.00	1,279.11	18.09
20	1,279.11	70.90	90.00	1,260.02	19.10
21	1,260.02	69.85	90.00	1,239.86	20.15
22	1,239.86	68.73	90.00	1,218.59	21.27
23	1,218.59	67.55	90.00	1,196.14	22.45
24	1,196.14	66.31	90.00	1,172.45	23.69
25	1,172.45	64.99	90.00	1,147.44	25.01
26	1,147.44	63.61	90.00	1,121.04	26.39
27	1,121.04	62.14	90.00	1,093.19	27.86
28	1,093.19	60.60	90.00	1,063.78	29.40
29	1,063.78	58.97	90.00	1,032.75	31.03
30	1,032.75	57.25	90.00	1,000.00	32.75

Yup, just went through the calculation myself.
No free yield lunch, Dixter.

 

[jazz4cash]

I have bought a few MYGAs in the past few months, the latest being Americo's 5-yr MYGA at 3.2%. Americo is rated A by AM Best.

Another caveat about MYGAs is their punishing early withdrawal penalties. Buy a MYGA only if you are certain you won't need the entire sum of money until its maturity.

I see an Americo 5 yr MYGA that pays 3.2% and it does feature a 10% free withdrawal each year. That makes it more attractive IMO.

 

[Dtail]

I see an Americo 5 yr MYGA that pays 3.2% and it does feature a 10% free withdrawal each year. That makes it more attractive IMO.

They are yielding 95 bps better than any other A rated MYGA for a 5 year term.
That is a large difference. I wonder why?

 

[jazz4cash]

They are yielding 95 bps better than any other A rated MYGA for a 5 year term.
That is a large difference. I wonder why?

[-]I can't even find it now.....it was there this morning![/-]
NM, I do see it's still there. No idea why they can beat the competition so handily, but I would be comfortable to send a chunk of money to them. The 10
% free withdrawal is a nice feature that is not discussed too much. I expect MYGA will continue to be a topic of increasing interest on this forum.

 

[calmloki]

Friday we signed to sell a 9-unit oooold set of apartments we've had for 33 years. Mostly student housing for the local college, and the tenants were, to a higher degree, great. Sold for 15.7 times what we paid for it (ignoring the odd roof or two, electrical systems, reconstruction...). We will carry the contract at 4.75% for ten years. Kind of depressed about the sale, but trying to view it as a secure bond paying 4.75%. Better interest than GTE, and frankly it feels more secure. Hope so anyway. We have a number of CDs maturing in 2021 and don't know where we'll stash the cash - not real excited about being forced into the stock market much more than we are.

 

[catotx]

They are yielding 95 bps better than any other A rated MYGA for a 5 year term.
That is a large difference. I wonder why?

I'm in the process of buying this MYGA and I suspect the rate won't last very long. Once in a while, there would be a MYGA offering that stands out but it will only last for a month or two. For example, I bought the Oceanview 3-yr MYGA at 3% in June. At that time, the rate stands out; the rate now is 2.35%.

 

[OAG]

Would you mind providing some details regarding how you set up the auto transfer to NFCU?

Also are your funds in a IRA CD account or regular CD account?

Regular CD's. At PFCU go to ACCOUNT ACTIONS then CERTIFICATE OPTIONS.

You can set up disposition of the CD at Maturity and/or disposition of the monthly interest (Accrue to send the interest to another Account).

 

[jazz4cash]

Good idea to check on these as Dtail suggests. Also check to see if they are considered to be in the "pool" (for want of a better technical term) that insurance companies use to pay claims on other insurance instruments when insurance companies occasionally DO go out of business. As always, YMMV.

Still not clear on what is meant by being in the “pool” and how to check for this. I’ll be monitoring rates and studying MYGA details until my next batch of CDs mature.

 

[pb4uski]

I think the pool is referring to state guaranty funds that provide resources to failed insurers that a commissioner takes over through receivership.... there is n such thing as bankruptcy for insurers.

 

[Golden sunsets]

VBIRX (ETF equivalent BSV) may be worth considering. Short (1-3 duration), 70% U.S. Government bonds 30% corporates and has never had a losing year (not to say it couldn't happen in the future). So far it's the least risky bond fund I've found with a positive real return.

Unfortunately the current SEC yield on BSV is .33%, less than half of most HY savings yields.

 

[Car-Guy]

I haven't been keeping up with CD rates lately but one of our local banks, who usually paid among the best, is currently paying 1.6% on tIRA's, 1.11% on 48mo jumbo CD's and 1% on 48mo CD's... Pretty bad IMO.... Last year, I moved all my tIRA's and CD's money to my various brokerage accounts since rates were so bad... Using the sweep fund features in my brokerage accounts, I can park my cash in various short term bond funds and get a little interest until I need it for stock buys. Bottom line, I've positioned myself for the next big drop.

I was going to move my 401k money to my brokerage accounts too but they are still playing over 3.5% on all cash and that's getting me ~50k a year just letting it sit there. They won't allow me to add money to the 401k (since I'm retired) or I would...

Bottom line, IMO, it's a war on safe savers.

 

[jazz4cash]

I think the pool is referring to state guaranty funds that provide resources to failed insurers that a commissioner takes over through receivership.... there is n such thing as bankruptcy for insurers.

That's what I think also, but don't you have to be "in the pool" to get the state guaranty fund protection? I thought Koolau was suggesting being in the pool was bad, but maybe I misread the comment.

As far as I know an insurance company has to be licensed by each state to do business there and participate in the State Guaranty Association (SGA) "pool". That's why most annuity quotes will require you to input your state of residence. There are different limits of coverage as well.

https://www.annuity.org/annuities/regulations/state-guaranty-associations/

 

[ShokWaveRider]

SGA Guarantees up to $250k in Florida. I am concerned with all the natural disasters that Insurance companies will be going down in status ratings. There will be / are a lot of claims.

 

[pb4uski]

SGA Guarantees up to $250k in Florida. I am concerned with all the natural disasters that Insurance companies will be going down in status ratings. There will be / are a lot of claims.

Natural disasters would not result in claims for life, accident & health insurers that issue annuities... they do not write property and casualty insurance coverage... life, accident & health insurers and property and casualty insurers are separate animals.

That said, it is possible for a life, accident & health insurer to own a property and casualty insurer or vice versa or for a holding company to own each type... but even then the finances and regulatory surveilance are separate and distinct to each company.

The guaranty funds are separate as well... one for life, accident and health insurers and one for property and casualty insurers... and they are separately funded. As I recall, on builds up a reserve fund and the other simply assesses as needed... I think P&C is the one that builds up reserves.

 

[dixter]

you shouldn't use amortization schedules for bonds the same way you used amortization to buy a trailer house....

This is simple... you buy a 30 year bond, its coupon is 9% per year and its purchase price is $1500... the $1500 is comprised of the par value of $1000 and the $500 is the upcharge (above Par)
When the bond matures you will be given back the par value of $1000... so your true cost of ownership is the $500... so $500/30yrs=$16.66 per year.... the 9% coupon paid per year is $90... so $90-$16.66=$73.34 and so the 30yr bond at 9% coupon is yielding 7.334% per year, per bond...
For some reason I think I'd rather have 7.334% on a bond vs .05% in a bank...

BTW- for clarification sake I just now looked at a bond on fidelity with a maturity date of 2047, it has a coupon of 9.98% yearly, its call protected, and its above par value by $330... for this real example.. its $330/27yr=$12.22yr, $99.80-$12.22=$87.58 per year...
why put money into a bank If you like to travel and don't want to put your money into bonds to make you more money you can also just park your money into a bank that pays you AA miles, like Bask does... at least you will get something out of your money like a free trip to Hawaii for two each year... ya got options...

 

[pb4uski]

dixter, you're just wrong.... bond amortization schedules are a little different fron the ones you use for a mortgage because most bonds are not sinking fund bonds, but what is common to both is that they use effective interest, not straight line premium amortizarion like you are suggesting.

There is no doubt that the effective yield on a 30 year bond that pay a 9% coupon that you pay $1,500 for is 5.54% and no 7.334%.... its just math... see the RATE formula or IRR table from my prior post.

But the major point that you have now conceded is that if you buy a 9% coupon bond and interest rates are lower so you pay a premium that your yield is not the 9% coupon but is lower than 9%... so that is progress.

Care to provide a CUSIP for that 2047 maturity with a 9.98% coupon?

 

[dixter]

I'll stay just wrong... and enjoy the 8.758% for the next 27 yrs... my bank account thanks me...

there is NO reason to amortize a bond... you buy the bond, you pay for the bond, the bond pays you the coupons every 6 months and if you hold till maturity you get the par value back... so in the end you get the coupon money and the par value of the bond ...

why try to make it harder than it is...

here is one more way to look at it... you buy a bond, it costs you $1300... it pays 10% coupon ($100/yr)... so you apply the $100/yr for 3 yrs to pay you back the $300 above par value... your now at par value with your bond investment and for the next 27yrs your true yld is 10%.... again, you don't need to amortize at all... simple math here..

 

[OldShooter]

I'll stay just wrong ... simple math here..

Wow. Try searching "yield to maturity" or "internal rate of return." 2+2=5 is simple math, too, but it is wrong.

Different subject: You guys are getting me interested in these MYGAs. We have low six figures in TIPS maturing in January and as we get older we need less inflation protection. So maybe it is time to park this money at a little higher rate.

But where is the magic here? Is the insurance companies' cost of capital so much higher that they can afford to offer these premium rates to retail investors? I get it that the risk is not FDIC protected but with the state pools and good AM Best ratings, the higher rates seem too good to be true. What am I missing? @pb4?

 

[jazz4cash]

Wow. Try searching "yield to maturity" or "internal rate of return." 2+2=5 is simple math, too, but it is wrong.

Different subject: You guys are getting me interested in these MYGAs. We have low six figures in TIPS maturing in January and as we get older we need less inflation protection. So maybe it is time to park this money at a little higher rate.

But where is the magic here? Is the insurance companies' cost of capital so much higher that they can afford to offer these premium rates to retail investors? I get it that the risk is not FDIC protected but with the state pools and good AM Best ratings, the higher rates seem too good to be true. What am I missing? @pb4?

Dixter's response is about what I expected but I don't think there's any point trying to convince him/her otherwise. (Hint: you pay the full premium up front and you do not get a portion back every every year with your coupons.)
For anyone that is unfamiliar with the bond price/yield calculation, please check any of the dozens of reputable bond yield calculators on the web and you will see the yield to maturity in Dixter's example is 5.54%, not 7.334.


Glad you are intrigued by these MYGA offerings.....Maybe we need a dedicated thread as we all learn together. As far as the "magic" that enables an insurance company to beat a CD, I don't know but I did note the blueprint income website has details on commissions paid to the seller which is in the 1-2% range. I like Blueprint Income the best but Stan the Annuity Man and immediateannuities.com are also good and they mostly have the same products from what I've seen.

 

[dixter]

Here's another one... this is a direct copy/paste from the Fidelity web site... no fancy simple math... 7.175%, call protected.... and I'm out...
The OP asked " I have CDs spaced out over the next few years, but with the rates so low where else can you put safe money and get a descent return ?
Thinking about some short term bond funds ? "
And I gave some solutions... not sure he got anything else from some folks here.. but what ever... you guys enjoy your returns...

From the Fidelity web site 5 minutes ago...

Basic Analytics
Price (Bid) 130.250
Price (Ask) 133.000
Depth of Book View
Ask Yield to Worst 7.175%
Ask Yield to Maturity 7.175%
Current Yield 7.503%
Yield to Sink --
Third Party Price 129.220
Spread to Treasuries 5.788
Treasury Benchmark 27 YR.(3.000% 02/15/2047)
Recent Trade View Recent Trades
Price 130.063
Quantity 20
Date/Time 09/18/2020 16:11:27
Buy/Sell CS

 

[OldShooter]

Dixter's response is about what I expected but I don't think there's any point trying to convince him/her otherwise. ...

Agreed.

... Maybe we need a dedicated thread as we all learn together. ...

I've emailed my Schwab guy; probably Schwab has a position paper on these. I've also emailed an FA that runs some nonprofit money where I'm on the investment committee. I'll report back if I get anything of interest.