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Investing in Bonds
- Thread starter Don87109
- Start date
Let me try to clear up some items when investing in fixed income securities:
1. If preservation of principal (i.e. safety) is primary concern, then one must only consider higher rated bonds (AA or better).
2. Once you itemize all available AA or better rated bonds, then evaluate if there are call features. You may see higher coupons with bonds that have call features. Granted, if you are sure (lol) that rates will rise, then callable bonds MAY ne worth the added risk (of being called).
3. Very important!! Your tax bracket. If you are 35%, then muni bonds may provide you with a better after tax yield. Pure and simple. (5% bond that is taxable at 35% fed tax rate equals the same as 3.25% tax free bond)
4. If you are a bond trader that is looking to assume risk for a given reward, then fine...consider below investment grade bonds. Remember that the 6, 7, 8, or 9% you might be offered is interest income (not appreciation). Therefore, taxable as ordinary income. Furthermore, academic research will prove out that if you are willing to assume the greater risk that "high yield" or "junk bonds" entail, then you would be better off allocating that risk to equities....the payoff could be so much greater for same amount of risk.
The point is to compare apples to apples. Comparing a treasury bond to an agency bond to a cd to a muni is legitimate. Comparing a treasury to IB bond or Ford is not legitimate.
Attached is a sample of bond yields for 12/29. Depending on the length of time you wish to hold the bond, just pick which row offers the best AFTER TAX yield.
Lastly, CD's are not very liquid, or worse, could impose penalities for early liquidation. Great choice if you don't need the money quickly. Beware.
1. If preservation of principal (i.e. safety) is primary concern, then one must only consider higher rated bonds (AA or better).
2. Once you itemize all available AA or better rated bonds, then evaluate if there are call features. You may see higher coupons with bonds that have call features. Granted, if you are sure (lol) that rates will rise, then callable bonds MAY ne worth the added risk (of being called).
3. Very important!! Your tax bracket. If you are 35%, then muni bonds may provide you with a better after tax yield. Pure and simple. (5% bond that is taxable at 35% fed tax rate equals the same as 3.25% tax free bond)
4. If you are a bond trader that is looking to assume risk for a given reward, then fine...consider below investment grade bonds. Remember that the 6, 7, 8, or 9% you might be offered is interest income (not appreciation). Therefore, taxable as ordinary income. Furthermore, academic research will prove out that if you are willing to assume the greater risk that "high yield" or "junk bonds" entail, then you would be better off allocating that risk to equities....the payoff could be so much greater for same amount of risk.
The point is to compare apples to apples. Comparing a treasury bond to an agency bond to a cd to a muni is legitimate. Comparing a treasury to IB bond or Ford is not legitimate.
Attached is a sample of bond yields for 12/29. Depending on the length of time you wish to hold the bond, just pick which row offers the best AFTER TAX yield.
Lastly, CD's are not very liquid, or worse, could impose penalities for early liquidation. Great choice if you don't need the money quickly. Beware.
Attachments
Thanks, craigatelite, I'll have to take another look at Muni's, but I am still leaning toward TIPS which yielded about 5.8% in the last year. With the now high energy prices I would think inflation continues for a while.Quote from craigatelite:
Let me try to clear up some items when investing in fixed income securities:
1. If preservation of principal (i.e. safety) is primary concern, then one must only consider higher rated bonds (AA or better).
2. Once you itemize all available AA or better rated bonds, then evaluate if there are call features. You may see higher coupons with bonds that have call features. Granted, if you are sure (lol) that rates will rise, then callable bonds MAY ne worth the added risk (of being called).
3. Very important!! Your tax bracket. If you are 35%, then muni bonds may provide you with a better after tax yield. Pure and simple. (5% bond that is taxable at 35% fed tax rate equals the same as 3.25% tax free bond)
4. If you are a bond trader that is looking to assume risk for a given reward, then fine...consider below investment grade bonds. Remember that the 6, 7, 8, or 9% you might be offered is interest income (not appreciation). Therefore, taxable as ordinary income. Furthermore, academic research will prove out that if you are willing to assume the greater risk that "high yield" or "junk bonds" entail, then you would be better off allocating that risk to equities....the payoff could be so much greater for same amount of risk.
The point is to compare apples to apples. Comparing a treasury bond to an agency bond to a cd to a muni is legitimate. Comparing a treasury to IB bond or Ford is not legitimate.
Attached is a sample of bond yields for 12/29. Depending on the length of time you wish to hold the bond, just pick which row offers the best AFTER TAX yield.
Lastly, CD's are not very liquid, or worse, could impose penalities for early liquidation. Great choice if you don't need the money quickly. Beware.
Relative to higher yield bonds like Ford, one of the talking heads on TV said to remember that bankruptcy can be a business strategy. At-least until the laws are tightened like they did with individuals. This makes you think a little more before flirting with high yield bonds. Especially if the laws are changed then you may have a flood of bankruptcy's before they become effective like what happened with individuals.
Don
Are the AAA corps paying more than IB's normal cash interest rate? As I recall IB currently pays about 4%.Quote from Bob111:
that what i was doing. i daytrade on margin and keep the money in very short AAA-A corps. with such low commission IB offer you can hold VERY diversified portfolio of bonds
Don
I just remembered that IB doesn't pay interest on the first $10k and therefore depending on your total cash balance the total return can be a lot less than 4%.Quote from Don87109:
Are the AAA corps paying more than IB's normal cash interest rate? As I recall IB currently pays about 4%.
Don
BTW, IB also does not pay interest on credit balances from the short sale of stocks. Have you been able to circumvent that drawback somehow?
Don