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Secondary market Gics
March 25, 2020
8:37 pm
Bud
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Got this message from a bank broker. I still struggle with secondaries like some bonds how to value them exactly. Does anyone buy them or understand?

"With the rush to liquidity were getting secondary GICs available on a daily basis paying 2.5-3% varying in duration from months to 4 years.  Let me know if you have any interest."

March 26, 2020
4:46 am
3oakwest
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What Bank?

March 26, 2020
5:02 am
Bud
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Royal

March 26, 2020
6:12 am
Norman1
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Second-hand GIC's are very much like bonds, which are usually second-hand.

Bonds usually pay interest every six months. That will vary with a pre-owned GIC depending on what the original purchaser selected.

One would value them like a bond. Interest payments, maturity date, and value at maturity are fixed. Purchase price would vary to provide the desired return.

Deposit insurance coverage is a bonus. sf-smile

March 26, 2020
9:13 am
3oakwest
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Thank You Bud

March 30, 2020
2:15 pm
Bud
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Secondary quotes today

General Bank maturing Oct29/21 yielding 3.25% cost above par $83,252 matures at 80k coupon 3.06% (ur yield assume) has accrued interest $3512 yield to maturity 3.25%

Home Trust Feb16/21 yielding 3.28 above par I assume only $38,339 available

March 30, 2020
5:48 pm
Norman1
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That General Bank of Canada GIC quote can't be right.

One cannot have a yield to maturity of 3.25% if one pays above par value for a 3.06% GIC that matures at face value.

When one pays more than 100% of face value for a bond, the yield to maturity will be lower than the coupon of the bond, not higher, because of the capital loss at maturity.

March 30, 2020
8:58 pm
Bud
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maybe worded wrong its 3.06 yield to buying investor, price to buy above par. 3.25 maybe then the coupon. my impression i'd get 3.25% then take a loss of capital at maturity bringin the yield to me down to 3.06

why i dont buy these things or bonds above par nobody knows how to explain the technical even people in the industry they just sell it n forget it. its like math these days people dont know the basics they just get the answer from their terminal.

and the fed wonders why liquidity dries up..

seems basic yet nobody knows even the experts including rob carrick 😉

March 31, 2020
8:37 am
Norman1
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That makes more sense: Above par, 3.25% coupon, and 3.06% yield-to-maturity.

It is expected that those investing in bonds know what a coupon is and what yield-to-maturity means.

The mathematics and the terminology are not secrets. Lots of web sites, investment math textbooks, and courses out there cover them. It is up to each investor to spend the time to learn what are considered to be the basics about bonds and their pricing.

March 31, 2020
10:09 am
Bill
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Buying bonds at a premium can be a way, while achieving overall current rates of return, to generate capital losses to offset other capital gains you may have in the year of maturity.

March 31, 2020
3:36 pm
Norman1
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The catch with that is the resulting capital loss deduction is 50% of the capital loss and cannot be used to offset the taxes on the higher interest payments. The higher interest is 100% taxable.

The yield-to-maturity calculation does not take those into account.

It is really not a good idea to pay significantly above face value for a bond or GIC outside of an RRSP or TFSA. Pension funds don't care because, like in an RRSP, the capital losses does offset some of the interest earned in them.

March 31, 2020
5:28 pm
Bill
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Agreed, Norman1, generally not recommended to do this only for the capital loss generation aspect.

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