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The basics of buying bonds: A timely refresher
June 4, 2014
4:15 pm
kanaka
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Here is an interesting article that iTRADE sent to me today.

http://www.theglobeandmail.com.....ck=dlvr.it

June 4, 2014
7:21 pm
Loonie
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Thanks! I've never bought any, in part because I can't understand the gibberish. This might help.

June 4, 2014
7:43 pm
kanaka
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I still don't see the point of them especially for TFSA (when 5000 was the max).

Here are questions I asked my self and came to the conclusion to not bother. But I do have bond ETF's.

TFSA - you must buy 5000 face value plus commission.
So do you buy a bit overvalued or undervalued or strip.
Risk based on ratings vs an insured GIC
Is yield shown compounded.
Can I sell before maturity and if I do, what is my yield.
Is rate or yield as good as or better as a five year GIC.
Can I find a good yield, good rating, for a decent period to mature like 5 6 or 7 years. I can see taking a term for 10 or 15 years if the yield was good and I was 40 years old.
Where can I find what is available? Have a great selection in my iTRADE account.

June 4, 2014
8:37 pm
AltaRed
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When you buy a bond, you will pay what is shown (the yield offered is based on the face value you are buying although in iTrade, the price is the price is the price and thus the yield is the yield is the yield, but you have to add $25 commission* on to the price). I don't get your comment about overvalued or undervalued. However, it is important to know you will also have to pay for the accrued interest since the last payment date. For example, a $5k bond with a coupon of 5%, will pay out $125 in interest each 6 months. If the last coupon date was Apr 30th and you are buying the bond today, you have to also buy the accrued interest since Apr 30th (to pay the seller of the bond the interest he is due up to today). Don't get caught thinking your $5k bond only costs $5k + commission.

The yield is an annual yield. It does not compound because interest is paid out semi-annually (usually).

You already said you see the iTrade inventory. Pick and choose from that list. If you don't like what is on the list, phone them up and see if they have anything else to offer. I doubt it unless you are a big customer buying large face value and they may have something else from their bond desk. Note: I believe Scotia Capital is the biggest Cdn bond dealer of the big 5....so their bond desk has a lot.

Yields will vary depending on credit quality and years left to maturity. You will find most AAA/AA/A investment grade 5 year bonds do not beat GIC interest rates. BBB bonds do (e.g. many REITs) as do non-convertible debentures (which by the way are unsecured).

* iTrade's commission is $1/$1000 face value with a minimum of $24.99. With a $5k bond, that is steep. I'd rather buy $20-25k of face value for my $24.99 commission. Note: Other discount brokerages have been burying their commissions and they are also expensive at small face values of less than $10k. Short answer: Don't buy bonds at such low face values.

June 4, 2014
8:48 pm
kanaka
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Probably wrong terminology. Some bonds cost more than a 1000 because they are worth more if you don't purchase on day one of the issue. I noticed there are also bonds that only cost say.....950 at time of purchase. And there are also strip bonds.

June 4, 2014
9:20 pm
AltaRed
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Nominal bonds are priced off $100 par value. Almost all, if not all, investment grade nominal bonds today (other than those discounted because of debt servicing issues/insolvency) are priced above $100 because their coupon yield is higher than the current yield to maturity. IOW, as bond yields have come down over the past 30 years, bond prices have gone above par accordingly.

Strips are different....they are priced <$100 depending on their implied yield to maturity (as would you when you buy T-bills).

Added: About the only time in recent years one saw a nominal bond price discounted below $100 is with non-investment grade (speculative) junk where perceived (if not real) risk of insolvency and default came into play. Examples in recent years: Yellow Media, BCE during the attempted vulture fund takeover, automakers, etc. If a bond is priced below $100, take a really hard look. They are not priced at those levels for no reason.

June 6, 2014
11:22 am
kanaka
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Sorry my apology. It has been a while ago when I researched bonds. I have just reviewed my iTRADE account for bonds and searched BBB and lower and found a few that were less than $100 to purchase. For some reason I thought that a bond face value was $1000 and the minimum purchase at most brokerages was $5000 face value. So for me, at the start of TFSA, to buy bonds at $5000 face value plus the commission would mean I would have to look at bonds less than 100 face value. Now that TFSA has been around for awhile and we can now deposit $5500 it would make it easier to buy BBB or higher. So my thoughts are still vague in regards to purchasing bonds, as first you have to select a risk rating that you feel comfortable with like A and up. Then you have to select a maturity date that you feel comfortable with, like between 1 and 7 years due to my age. Then, of course, the best yield you can find. So if I found a bond at my comfort level and say it was 5 year to mature and 3% yield I am assuming that in 5 years my $100 bond would be worth $103 or $115? Unless taxation on bond yield/interest allows me to net more than a 5 year compounding GIC at 3% I remain dubious to buy bonds.

Am I thinking the right way????

June 6, 2014
5:46 pm
AltaRed
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kanaka said

So if I found a bond at my comfort level and say it was 5 year to mature and 3% yield I am assuming that in 5 years my $100 bond would be worth $103 or $115? Unless taxation on bond yield/interest allows me to net more than a 5 year compounding GIC at 3% I remain dubious to buy bonds.

Am I thinking the right way????

Not really. Nominal bonds mature at $100. Interest is paid out semi-annually. Let's look at a specific example from Scotia iTrade's corporate bond inventory today:
Brookfield Asset Management (A low credit rating), maturing 2019/04/09 @ 3.95% coupon. Price today is $105.053 yielding 2.822% to maturity.

If you buy $5000 of face value today, you will pay $5252.95 for that $5000 bond, getting $197.50 of interest per year ($98.75 every 6 months) until maturity. You will also pay $34.09 accrued interest because of the approximately 60 days that have accrued since the last coupon interest payment on April 9th. Total cost to you will be $5312.043 (5252.95 + 34.09 accrued interest + 24.99 commission).

The yield of 2.822% to maturity reflects that you paid $5252.95 for that $5000 bond (2.8% if you include commission in your calculation). That is slightly better than a 5 year GIC at circa 2.6-2.7%.

Note: If this is in a taxable account, you can claim the $34.09 as a purchase interest expense this year on your income tax filing. At maturity of the bond in 2019, you will also report a capital loss of $252.95 + $24.95 commission. It is not a good idea to buy premium bonds in a taxable account because while you get interest paid at 3.95%, such interest is taxable at marginal rates while capital losses are recovered only at half the marginal rate.

FWIW, I saw only one Corporate nominal bond of BBB that had a price marginally under $100 with a maturity less than 5 years... and none at the BB level.

June 6, 2014
10:12 pm
Loonie
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From my perspective, it still doesn't seem like a good investment. You can still get 3% x 5 years at Oaken, registered or not. Why take the risk on a lower-rated bond?
However, I can appreciate that many of us will have more than the CDIC-insured 100G available to invest, and will need more than one pocket to invest it in.
Thanks for the explanations, AltaRed. It may be a little too sophisticated for me, as I don't understand all the language.
Are there any books like, say, bonds for dummies or something like that, do you know?

June 7, 2014
6:49 am
AltaRed
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For what it is worth, I am not suggesting nominal bonds are better than GICs (other than being more liquid), only how nominal bonds are bought.

I don't know a good source for reading regarding bonds. It's been decades since I read 'how tos' on bonds. I suspect a Google search would be a good start.

June 7, 2014
9:02 am
Norman1
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I find that corporate bonds are just not compelling for those with modest amounts to invest.

Loonie mentioned that Oaken is offering five-year, CDIC-insured, annual-pay GIC's with a rate of 3%. Now, bonds pay semi-annually. However, Oaken's five-year, semi-annual pay GIC is 2.95%. Riskier, non-insured, Brookfield Asset Management 2019/04/09 3.95% bonds, yielding a lower 2.822% to maturity, are just not compelling.

In contrast, if one had $100 million to place for five years, then things look different. Not practical to spread the money over 1,000 CDIC institutions to get the $100 million insured. For federal government backing, one would have to buy Government of Canada bonds.

Five-year Government of Canada bonds currently yield around 1.58% to maturity. Going from a government-backed 1.58% to a non-government backed 2.822% does look compelling.

June 7, 2014
9:49 am
AltaRed
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Norman1 said

I find that corporate bonds are just not compelling for those with modest amounts to invest.

I agree completely.

Bonds should be bought in not less than $10k amounts, and preferably not in less than $20-25k amounts. Indeed, Scotia's fee schedule suggests $25k is a good minimum given their minimum commission of $24.99 (1% at $25k). Then one should be diversified amongst providers and term length. If modest investors want to be in bonds, then a bond ETF is the only practical solution. Even then, the MER eats away at performance returns (MER must be subtracted from the Yield to Maturity to get actual performance). All in all, the modest investor is best in GICs (in this current environment anyway).

I used the Brookfield example on purpose.... to show that a A grade corporate bond barely meets the GIC competition (and not even then if one wants to chase yield by running to the Oaken's and CU's of the universe - albeit most investors do not go to that effort).

June 7, 2014
12:37 pm
Loonie
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Norman1 said
If one had $100 million to place for five years, then things look different. Not practical to spread the money over 1,000 CDIC institutions to get the $100 million insured.

A problem that, sadly, I haven't had to face yet.
I think that in this situation one might become a Dragon on the TV show Dragon's Densf-smile They seem to have literally more money than they know what to do with!

June 7, 2014
7:13 pm
kanaka
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AltaRed said

Norman1 said

I find that corporate bonds are just not compelling for those with modest amounts to invest.

I used the Brookfield example on purpose.... to show that a A grade corporate bond barely meets the GIC competition (and not even then if one wants to chase yield by running to the Oaken's and CU's of the universe - albeit most investors do not go to that effort).

Altared, thanks for your explanations in regards to bonds. In regards to chasing rates, you are correct, most don't and/or don't even know there are better rates. In my example I stumbled on this site years ago and saw the great rates in Manitoba and I confirmed that the insurance was ok from the Money Sense experts. I approached my adviser if they would use those credit unions and his group decided not to.....but chances are those credit unions wouldn't deal with my advisors as they would want a commission. Nevertheless I calculated I had lost over 2500 a year for more than 10 years, just by accepting lower interest rates. And that is a huge loss that could have gone towards withholding taxes. Since our portfolios are very conservative there is no point of continuing to allow my advisor to invest my GIC's. With a little effort I now have accounts at Outlook Financial, Accelerate, Hubert and Oaken. So when money is to be invested or reinvested I pick the one with the best rate. Yes they all have different methods and systems but they are all good to deal with. So for any one reading this......take the time....a few hours, a few days.....make an easy $25,000!!!!!!

Thanks to everyone here!

Ps. I don't plan on investing in bonds and will look at my bond ETF's as per Altared's comment re MER's.

June 8, 2014
9:42 am
GS1
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Loonie said
[snip]

Are there any books like, say, bonds for dummies or something like that, do you know?

My go-to book when I was learning about bonds was the first edition of "In Your Best Interest, the Ultimate Guide to the Canadian Bond Market" by Hank Cunningham - see details about his latest offerings here here.

GS

June 8, 2014
10:51 am
Norman1
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kanaka said
.... In regards to chasing rates, you are correct, most don't and/or don't even know there are better rates. In my example I stumbled on this site years ago and saw the great rates in Manitoba and I confirmed that the insurance was ok from the Money Sense experts. I approached my adviser if they would use those credit unions and his group decided not to.....but chances are those credit unions wouldn't deal with my advisors as they would want a commission. Nevertheless I calculated I had lost over 2500 a year for more than 10 years, just by accepting lower interest rates. And that is a huge loss that could have gone towards withholding taxes.
....

I suspect that would have likely been the case.

According to the May 24, 2013 issue of the Money Reporter newsletter, the customary deposit broker commission for a GIC is ¼% for each year of the GIC's term. For example, a deposit broker selling a three-year, $10,000 GIC would be paid

    (¼% per year) x $10,000 x 3 years = $75

by the GIC issuer.

June 8, 2014
10:59 am
Norman1
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Loonie said

Norman1 said
If one had $100 million to place for five years, then things look different. Not practical to spread the money over 1,000 CDIC institutions to get the $100 million insured.

A problem that, sadly, I haven't had to face yet.

I think that in this situation one might become a Dragon on the TV show Dragon's Densf-smile They seem to have literally more money than they know what to do with!

Haven't had that problem yet either! sf-laugh

However, that problem is not that uncommon among institutional investors, like pension funds and insurance pools. I strongly suspect they are the ones who are buying those corporate bonds for, what seems to us to be, uncompetitive yields.

June 8, 2014
11:31 am
kanaka
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Norman1 said

kanaka said
.... In regards to chasing rates, you are correct, most don't and/or don't even know there are better rates. In my example I stumbled on this site years ago and saw the great rates in Manitoba and I confirmed that the insurance was ok from the Money Sense experts. I approached my adviser if they would use those credit unions and his group decided not to.....but chances are those credit unions wouldn't deal with my advisors as they would want a commission. Nevertheless I calculated I had lost over 2500 a year for more than 10 years, just by accepting lower interest rates. And that is a huge loss that could have gone towards withholding taxes.
....

I suspect that would have likely been the case.

According to the May 24, 2013 issue of the Money Reporter newsletter, the customary deposit broker commission for a GIC is ¼% for each year of the GIC's term. For example, a deposit broker selling a three-year, $10,000 GIC would be paid

    (¼% per year) x $10,000 x 3 years = $75

by the GIC issuer.

My adviser used to provide us with GIC's direct with the Credit Union and he acted as the agent. We always did better, rate wise, than the Credit Union's posted rate. But of course through this web site I can find much higher rates and even after paying a transfer fee am far better off. Yes I know some financial institutions will pay for your transfer......the first transfer i have initiated was with Oaken and they do not pay....and they do not have transfer out fees....so their policy makes sense. Here is a link to my Dropbox account.....it has the 2010 Version of Coast Capital Agency Manual. May be of some interest and/or may be used to promote sleepiness!!! sf-smile

https://www.dropbox.com/s/rnvik04f2gf9aki/5j%20Coast%20Capital%20Agency%20Manual%20-%20Version%20Mar.2011.pdf

June 8, 2014
11:45 am
kanaka
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GS said

Loonie said
[snip]

Are there any books like, say, bonds for dummies or something like that, do you know?

My go-to book when I was learning about bonds was the first edition of "In Your Best Interest, the Ultimate Guide to the Canadian Bond Market" by Hank Cunningham - see details about his latest offerings here here.

GS

Hi I searched my PDF collection for the word BONDS and here they are on Dropbox. There may be more than just bonds. Here

June 8, 2014
9:05 pm
Loonie
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Norman1 said

According to the May 24, 2013 issue of the Money Reporter newsletter, the customary deposit broker commission for a GIC is ¼% for each year of the GIC's term. For example, a deposit broker selling a three-year, $10,000 GIC would be paid

    (¼% per year) x $10,000 x 3 years = $75

by the GIC issuer.

I think I'll be a deposit broker when I grow up. The last time I bought a GIC through one of them, it was for 1 year at 1.45%, the same thing they offered me last month when it came up for renewal, but this time I didn't bite.
So, I'll set up a small business as a deposit broker in my basement, and you guys can all buy your GICs from me, and I'll take the .25 that you should have had if only you'd not gone through me. Heck, I'll knock off 5 basis points for friends. If all the people reading this thread come up with, let's say $10million between you, I can make $20,000 each and every year for doing not much more than I already do on my own behalf but with much less money! I too can read what it says on Cannex. Sound like a deal? Sign here, please__________. I also offer excellent vacuum cleaners, hot water heaters, and eavestrough cleaning services, and will appraise your house for free when I come to your door for a friendly follow-up chat.sf-wink

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