From: "Mark Freeland"
Newsgroups: misc.invest.financial-plan
Subject: Re: How to select individual bonds for purchase?
Date: Sun, 11 Feb 2007 23:21:26 -0600
iQBVAwUARc/5Vvl/I4+O31e5AQHbIAH9Hyxx6XEoBCPzO6+sePMfri/SgQMhQrbb
aWAuFntjaJRHfqJdh9x4QypmZ+uzLlVJXUlf6zF8gffj3AN/oYbDww==
=bZyU
"don" wrote in message
news:45cf1ef0$0$4838$4c368faf@roadrunner.com...
>I would appreciate recommendations for web sites or books with explanations
> on how to select individual municipal bonds for puchase.
An excellent site is InvestingInBonds.com. Their learning section is at:
http://www.investinginbonds.com/learnmore.asp?catid=2&id=62
> I have a decent understanding of how bonds work (interest rates up, bonds
> down), but am not sure how to select an individual bond to purchase. I
> did a
> search of NC bonds at the Vanguard Order Desk and see terms that I'm not
> familiar with, such as "callable 07/10@100 - Extraordinary Calls" and
> "Sinking
> Fund 07/20@100". I understand what it means for a bond to be callable,
> but
> not the figures or what an Extraordinary call is.
07/10@100 means that the bond is callable July 2020 at 100 (par). Bond
prices are generally quoted at 1/10 of their value - bonds with a face value
of $1000 are quoted as 100. You need to know this when you place orders for
bonds, because you may order, say, 5 bonds @99, meaning that you are buying
5 $1000 bonds at $990/bond.
Bonds are often callable at a premium. For instance, I've bought a muni
bond with a par call 04/15/09, callable 04/15/07@101.00. That means that it
may be called in 2009 at face value ($1000/bond), or in 2007 at a premium
price ($1010/bond, or a 1% premium). Unlike CDs, callable bonds often have
this feature that helps lessen the impact of getting called early.
You'll find a fairly good description of a sinking fund at:
http://www.riskglossary.com/link/sinking_fund.htm
Basically, a sinking fund provision requires a bond issuer to buy back part
of the issue periodically. So it is like a call, but partial and whether
you are the lucky one who gets his bond bought back is pure chance.
> Since these are bonds on the secondary market, it is not as easy to sell
> them
> as with mutual funds. Is there a source that gives an indication of how
> often/likely a bond is to be called? That way, I could purchase a 30-year
> bond, with the hope that it would be called in 5 years (if I was looking
> for a
> 5 year investment).
A bond purchased at a premium is more likely to be called. There are bonds
on the secondary market that carry high coupon rates. That higher rate
creates demand for the bond, forcing up its price (and forcing down its
yield); hence the premium on the price. So you are getting a fair yield on
the bond, but from the issuer's perspective, it is paying an above market
rate (the coupon rate). That makes it likely that the issuer will call the
bond when it can.
Conversely, a bond purchased at a discount is less likely to be called.
Read the site, keep asking questions. One other thing to keep in mind about
munis is that many (most?) of the AAA rated bonds are so rated because they
are insured. Local governments with lower credit ratings find it is cheaper
to pay for the insurance than it is to pay more on bonds that get issued at,
say, AA ratings. So muni ratings may not reflect the credit worthiness of
the issuer so much as the insurer. I don't think that's a big deal, but I
think you should know what the rating means.
Finally, if you have a question about a particular bond, post the CUSIP.
(The bond site I gave you provides a history of the buys and sells of the
bond, by CUSIP, on the secondary market.)
Mark Freeland
BnetOnewsX@sbcglobal.net
|