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Bonds

2,327 Views | 13 Replies | Last: 5 yr ago by BigJim49 AustinNowDallas
bigtruckguy3500
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Can someone give me the low down on bonds. I was playing around on my investing account and came across all these various bonds. Some have pretty high yields (like 8 or 9%), with credit ratings of BBB or so.

How many of y'all invest in bonds? What types? Do you put it in your IRA? How low of a credit rating do you go?
aggiebrad94
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AG
Investment grade = BBB or better
High yield (junk) = BB or lower

Bonds are fantastic for income. They also can provide a diversification tool to buffer the higher volatility of stocks.

I haven't seen investment grade bonds with that high of yield in quite a while. Can you provide the name & maturity.

RogerEnright
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I have some experience with bonds, but I agree with agbrad94, 8% to 9% seems pretty high for investment grade
bigtruckguy3500
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Yeah, honestly don't remember what I was looking at the other night just clicking around. I tried looking again and found this



Clicking on some of those I see a coupon rate higher than the yield. I'm not really following much of what's going on here. Trying to learn more.

Monywolf
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If the coupon rate is higher than the yield, the bond is trading at a price above par. It will mature at par so the yield to maturity is lower than the coupon.

Nothing wrong with a premium bond if you think interest rates are going higher and want to invest the cash flow at a higher yield. Otherwise, I'd be careful.

As always, if it sounds to good to be true...
aggiebrad94
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AG
When you looking at bonds there are several key features to be aware of:

Par = $1,000 per bond in most cases. This is the original issue price AND the price at maturity
Price = ??? bonds trade based on coupon, time to maturity, rating, etc.
Rating = see my post above
Coupon = % of par. It is set at time of issue and usually doesn't change (unless it is a step-up bond). It dictates the amount of income per year you get from each bond. For example: 5% coupon = $50 per year in income (5% x $1,000).
Maturity date = how long until you get your par value back
Yield = a calculation using price, income, and maturity date

The yield allows you to compare different bonds that have different coupons and prices. For instance, a 7% coupon selling for $1100 might have the same yield as a 2% coupon selling for $900.
Dazed and Confused
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bigtruckguy3500 said:

Can someone give me the low down on bonds. I was playing around on my investing account and came across all these various bonds. Some have pretty high yields (like 8 or 9%), with credit ratings of BBB or so.

How many of y'all invest in bonds? What types? Do you put it in your IRA? How low of a credit rating do you go?

My Bond Investments are in Bond Funds (Total Bond Funds) for diversification. My Bond money is for safety and follows my asset allocation. All of my tax-deferred accounts contain Bond Funds for tax efficiency. I would ask why are looking at bonds? When will you need this money and for what purpose? The lower the credit rating the higher the risk. What is your asset allocation and strategy? Goggle, Investment Policy Statement and do some research. There is a wealth of information on the Internet. Ask plenty of questions. Bolgeheads.org is a great place to start. I've learned a lot in the last several years, wish I had spent the time in my 20's learning more about how to achieve financial independence.
bigtruckguy3500
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Looking at bonds for a couple reasons. Namely want a lower risk investment than the stock market but a more "guaranteed" return that's higher than a CD. I'm still investing in the market, but I've got a feeling we might hit a bear market soon (which I know people have been scared of for like 5 years now).

And yeah, I definitely need more knowledge before I go investing.
Dazed and Confused
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AG
Start here: https://www.bogleheads.org/wiki/Getting_started
Monywolf
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bigtruckguy3500 said:

Looking at bonds for a couple reasons. Namely want a lower risk investment than the stock market but a more "guaranteed" return that's higher than a CD. I'm still investing in the market, but I've got a feeling we might hit a bear market soon (which I know people have been scared of for like 5 years now).

And yeah, I definitely need more knowledge before I go investing.
The three major indices were all down 20% from Oct - Dec, the standard definition for a bear market. They don't ring a bell at the top of the market when it's time to get out, or the bottom when it's time to get back in.

The best course of action is to figure out your risk tolerance and asset allocation, and then rebalance that portfolio when it gets out of balance. There is a reason the average investor grossly underperforms the averages.
2wealfth Man
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AG
Bond investor and CPA here. Get used to the taxation side of bonds as well. For covered securities you are going to have premium amortization if purchased at premium. That reduces the received (i.e. coupon) interest income. You may also have OID (original issue discount) which will be amortized and reported as additional income. There are de-minimus rules for computing when OID is actually to be recognized amortized. If your bonds have a call feature these amounts are going to be amortized based on the yield to worst (lower of yield to call or yield to maturity). These amounts will show as new items on you 1099-B for accounts in which you hold bonds. You won't have to do anything other than ensure that the 1099-B is reporting those amounts as required. Finally, make sure you note the accrued interest paid when you bought the bond and reduce your interest income by that amount. The trade confirmation and 1099-B should detail this for you.
Stive
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AG
We haven't had a bond conversation around here in a long time. Interest rates killed that conversation for most of a decade.
2wealfth Man
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Stive said:

We haven't had a bond conversation around here in a long time. Interest rates killed that conversation for most of a decade.
The other thing killing that market is lack of inventory. There are no more market makers willing to hold inventory. I purchase issues in the Texas muni market (ISD's, cities/counties and other special taxing districts) . When issues come out they seem to get snapped up almost immediately. You really have to be ready/willing to take what is out there on the day when you want to buy. There more may be a little more liquidity in the top-notch corporate debt markets but you are fighting the big institutional guys for a piece of that action.

One other interesting aspect of the muni market is that the 2018 tax act eliminated tax free status for bonds issued for advance refundings (i.e. where the proceeds were used to retire existing bonds). I have seen where advance refundings were estimated to be 50% of the muni market in new issues. It would also reason that some of these folks in high tax states that lost a large chunk of their deductions because of the $10k cap on real estate taxes may be more interested in tax free income from munis.
bigtruckguy3500
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Monywolf said:

bigtruckguy3500 said:

Looking at bonds for a couple reasons. Namely want a lower risk investment than the stock market but a more "guaranteed" return that's higher than a CD. I'm still investing in the market, but I've got a feeling we might hit a bear market soon (which I know people have been scared of for like 5 years now).

And yeah, I definitely need more knowledge before I go investing.
The three major indices were all down 20% from Oct - Dec, the standard definition for a bear market. They don't ring a bell at the top of the market when it's time to get out, or the bottom when it's time to get back in.

The best course of action is to figure out your risk tolerance and asset allocation, and then rebalance that portfolio when it gets out of balance. There is a reason the average investor grossly underperforms the averages.
I agree. I try to take the dollar/cost averaging approach and invest in commission free ETFs to minimize how much I hurt when the market goes down.
BigJim49 AustinNowDallas
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AG
try preferred stocks -6%- PFs mutual funds higher !
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