Has anybody invested in US Corporate Bonds? I was browsing the new issues and noticed GE and Toyota are offering Bonds with attractive Yeilds.
What are the pros and cons? How do they compare with our regular Bond MF, Money Market MF and CDs?
Discussion on fixed income, bonds, and bond mutual funds
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puneri_punter
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Discussion on fixed income, bonds, and bond mutual funds
Forward Calendar - U.S. corporate bond new issues
http://www.reuters.com/article/newIssuesNews/idUSNEUBD420070306
Lot of big corps such as AIG, Hartford, Citi, P&G,
http://www.reuters.com/article/newIssuesNews/idUSNEUBD420070306
Lot of big corps such as AIG, Hartford, Citi, P&G,
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puneri_punter
- Posts: 161
- Joined: Thu Feb 01, 2007 11:15 pm
Discussion on fixed income, bonds, and bond mutual funds
abuSibu;11294Forward Calendar - U.S. corporate bond new issues
http://www.reuters.com/article/newIssuesNews/idUSNEUBD420070306
Lot of big corps such as AIG, Hartford, Citi, P&G,[/quote]
What are the pros and cons? How do they compare with our regular Bond MF, Money Market MF and CDs?
Discussion on fixed income, bonds, and bond mutual funds
If one has the time and means to buy individual bonds and do bond laddering, then it is fine. Otherwise for most people a bond fund makes sense. Here are some differences between Bonds and Bond funds.
Bonds Bond Funds
Maturity Date Known None - Rolling
Min Investment 1,000 - 5,000 1,000 - 5,000
Increments Typically 1,000 Variable
Redemption At maturity Any time, at current NAV
Interest Rate Risk Declines nearing maturity Constant
Liquidity Active secondary market Daily liquidity
Up-front fees None Load
Ongoing Expenses None Mgt. Fees
Default Risk Credit Quality Minimized by diversification
Portfolio Control Customized Professionally Managed
Taxes consequences clear unexpected cap. gain distributions
Other Factors Fully invested retain portion for redemptions
Bonds Bond Funds
Maturity Date Known None - Rolling
Min Investment 1,000 - 5,000 1,000 - 5,000
Increments Typically 1,000 Variable
Redemption At maturity Any time, at current NAV
Interest Rate Risk Declines nearing maturity Constant
Liquidity Active secondary market Daily liquidity
Up-front fees None Load
Ongoing Expenses None Mgt. Fees
Default Risk Credit Quality Minimized by diversification
Portfolio Control Customized Professionally Managed
Taxes consequences clear unexpected cap. gain distributions
Other Factors Fully invested retain portion for redemptions
Discussion on fixed income, bonds, and bond mutual funds
Previous post is not formatted properly.
Bonds
Maturity Date Known
Min Investment 1,000 - 5,000
Increments Typically 1,000
Redemption At maturity
Interest Rate Risk Declines nearing maturity
Liquidity Active secondary market
Up-front fees None
Ongoing Expenses None
Default Risk Credit Quality
Portfolio Control Customized
Taxes consequences clear
Other Factors Fully invested
Bond Funds
Maturity Date None - Rolling
Min Investment 1,000 - 5,000
Increments Variable
Redemption Any time, at current NAV
Interest Rate Risk Constant
Liquidity Daily liquidity
Up-front fees Load
Ongoing Expenses Mgt. Fees
Default Risk Minimized by diversification
Portfolio Control Professionally Managed
Taxes unexpected cap. gain distributions
Other Factors retain portion for redemptions
Bonds
Maturity Date Known
Min Investment 1,000 - 5,000
Increments Typically 1,000
Redemption At maturity
Interest Rate Risk Declines nearing maturity
Liquidity Active secondary market
Up-front fees None
Ongoing Expenses None
Default Risk Credit Quality
Portfolio Control Customized
Taxes consequences clear
Other Factors Fully invested
Bond Funds
Maturity Date None - Rolling
Min Investment 1,000 - 5,000
Increments Variable
Redemption Any time, at current NAV
Interest Rate Risk Constant
Liquidity Daily liquidity
Up-front fees Load
Ongoing Expenses Mgt. Fees
Default Risk Minimized by diversification
Portfolio Control Professionally Managed
Taxes unexpected cap. gain distributions
Other Factors retain portion for redemptions
Discussion on fixed income, bonds, and bond mutual funds
The three key differences (besides other not as important) are:
1. Once you buy a bond whether at issue or at open market and you can hold it to maturity and thus not lose your principal. Principal will be redeemed at full value.
If you were to buy a bond fund instead, and interest rates rise, and remain there, your NAV has lost value.
It looks like the bonds are desirable from above. There are a few other factors in that bond fund will be over time picking up new bonds at higher coupon rates than older ones, thus improving on its portfolio but this impact would be small as on a yield basis the improvements would be negligible.
2. Diversification - A single bond carries risks of interest default and default of repayment of principal. This is the credit quality risk. I had bought some Lucent and Williams communications bonds in 2003 and lost money on both. Williams comm just went bankrupt.
With bond funds, because they hold thousands of bonds across industries and sectors, the credit risk is diversified and thus you have very low credit quality risk unless you are going for high yield bond funds (aka junk bond funds)
3. Commissions and expenses - we can buy stocks even $1 million worth for under $10 of commissions, bonds other than original issue have a much higher brokerage commision hidden in them as they are sold on yield basis.
When a bond is originally issued, there is no hidden commisions as the issuer pays the underwriter, but, it is a cost that is passed on to the buyer in a lower yield and eventually it shows up in the market value of the bond within a couple of months. If you plan to hold bond to maturity, this may not mean much to you, but in the end it is a commision whose impact is not easily visible, but more importantly this is unavoidable.
With bond funds, such commisions are not there directly to you, although when a bond fund buys bonds at original issue there still is that cost. Bond funds on the other hand have ongoing expenses which shows up as the expense ratio. This impacts your net dividends.
Something to be aware about.
1. Once you buy a bond whether at issue or at open market and you can hold it to maturity and thus not lose your principal. Principal will be redeemed at full value.
If you were to buy a bond fund instead, and interest rates rise, and remain there, your NAV has lost value.
It looks like the bonds are desirable from above. There are a few other factors in that bond fund will be over time picking up new bonds at higher coupon rates than older ones, thus improving on its portfolio but this impact would be small as on a yield basis the improvements would be negligible.
2. Diversification - A single bond carries risks of interest default and default of repayment of principal. This is the credit quality risk. I had bought some Lucent and Williams communications bonds in 2003 and lost money on both. Williams comm just went bankrupt.
With bond funds, because they hold thousands of bonds across industries and sectors, the credit risk is diversified and thus you have very low credit quality risk unless you are going for high yield bond funds (aka junk bond funds)
3. Commissions and expenses - we can buy stocks even $1 million worth for under $10 of commissions, bonds other than original issue have a much higher brokerage commision hidden in them as they are sold on yield basis.
When a bond is originally issued, there is no hidden commisions as the issuer pays the underwriter, but, it is a cost that is passed on to the buyer in a lower yield and eventually it shows up in the market value of the bond within a couple of months. If you plan to hold bond to maturity, this may not mean much to you, but in the end it is a commision whose impact is not easily visible, but more importantly this is unavoidable.
With bond funds, such commisions are not there directly to you, although when a bond fund buys bonds at original issue there still is that cost. Bond funds on the other hand have ongoing expenses which shows up as the expense ratio. This impacts your net dividends.
Something to be aware about.
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puneri_punter
- Posts: 161
- Joined: Thu Feb 01, 2007 11:15 pm
Discussion on fixed income, bonds, and bond mutual funds
Desi,
Thank you very much for the detailed explanation.
Two more quick questions:
If I purchase a bond in original issue, can I sell it before it matures? I am looking at this strictly from the liquidity perspective.
How easy is it to sell bonds compared with mutual funds/stocks?
Thank you.
Thank you very much for the detailed explanation.
Two more quick questions:
If I purchase a bond in original issue, can I sell it before it matures? I am looking at this strictly from the liquidity perspective.
How easy is it to sell bonds compared with mutual funds/stocks?
Thank you.
Discussion on fixed income, bonds, and bond mutual funds
Most bonds are fairly liquid and the broker will find a buyer. In most cases, you cannot sell, instantenously like a stock, but the broker will provide you with a quote (where the commision is hidden) which is based on yield basis) and you can sell within an hour or less based on liquidity, typically within minutes for more frequently traded bonds and this depends on the amount also whether it is 50,000 or a million.
To give you an example, I recently traded in an account - 40,0 California General Obligation Bond for a price of 100.12 when the market price was being quoted at about 101 and change. This was about 1% cost. This is high.The reasons for this being hgh are many, from bit to ask spread, to a comparitively lower liquidity when compared to stocks - however these commisions are coming down with time and competition. It is like the commision on trading stocks was some 25 years back.
To give you an example, I recently traded in an account - 40,0 California General Obligation Bond for a price of 100.12 when the market price was being quoted at about 101 and change. This was about 1% cost. This is high.The reasons for this being hgh are many, from bit to ask spread, to a comparitively lower liquidity when compared to stocks - however these commisions are coming down with time and competition. It is like the commision on trading stocks was some 25 years back.
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vishwaGhar
- Posts: 47
- Joined: Fri Mar 16, 2007 5:10 am
Discussion on fixed income, bonds, and bond mutual funds
Has anyone used Treasurydirect instead of Bond funds ? What are the pros/cons ? Also, if you can share your experience using Treasurydirect it will be much appreciated.
Thanx
vishwa
Thanx
vishwa
Discussion on fixed income, bonds, and bond mutual funds
Originally posted by pala69 Moved to this thread
02-23-2007, 03:57 PM
I read so many threads related to bond ,MF's, index fund etc in this forum . Many of the Senior member always suggest to buy some Bonds/Bond funds in our 401K/IRA etc . I fail to understand why Bonds when we have so many highy yield inetnet savings account options . I looked at some of the Bonds and Bond funds and genrally you will get around 4.5 to 5.5 % intrest on your savings. Now days many Internet banks give 5% and above intrest on the savings a/c . It was true that some years back the Banks APR on your savings were very negligibale and at that time it made sense to buy bonds , but if someone starts investing now then why he should choose bonds against these highy yeild savings a/c ? Am I missing some advantage of these bonds ?
I think there are some tax advantage if we buy the Bonds or Bond Funds but then we have more flexibility on these savings a/c .
There are so many internet banks money market savings a/c which gives around 5% yield which you can just google it, there is one called GE intrest plus which is not actully moneymarket but they call "corporate notes" where you even get better API then the money market a/c's.
Thanks
02-23-2007, 03:57 PM
I read so many threads related to bond ,MF's, index fund etc in this forum . Many of the Senior member always suggest to buy some Bonds/Bond funds in our 401K/IRA etc . I fail to understand why Bonds when we have so many highy yield inetnet savings account options . I looked at some of the Bonds and Bond funds and genrally you will get around 4.5 to 5.5 % intrest on your savings. Now days many Internet banks give 5% and above intrest on the savings a/c . It was true that some years back the Banks APR on your savings were very negligibale and at that time it made sense to buy bonds , but if someone starts investing now then why he should choose bonds against these highy yeild savings a/c ? Am I missing some advantage of these bonds ?
I think there are some tax advantage if we buy the Bonds or Bond Funds but then we have more flexibility on these savings a/c .
There are so many internet banks money market savings a/c which gives around 5% yield which you can just google it, there is one called GE intrest plus which is not actully moneymarket but they call "corporate notes" where you even get better API then the money market a/c's.
Thanks