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Old 11-17-2011, 12:39 AM   #1
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Nub help on reading Bonds

Can someone help explain the different values on this for me?
I have 3 listed, but just need an explanation on the first one (to keep things short).

If we look at the very first row of available bonds (Ontario 5.375%).. what do these terms mean in laymen terms?

1) 5.375%
- this the 'coupon'.. so I'm assuming the 'annual rate of return?'
- Expiry/maturity is Dec 2, 2012

2) Qty Avails?
- no idea what this means..

3) Price / $100
- I'm guessing this indicates whether the bond is trading over or under par?
- If I buy a bond thats above par (say.. for example $110.. i.e. 10$ above par), on the maturity date, will I get the principal amount back? or just the 'par amount'

4) Yield
- 0.606%
- what does this value mean? I was thinking the 5.xx% would be the annual yield, so I'm completely lost as to what this 0.606 thing is.. commission fee?

5) Credit rating..
- I'm not that newb

After losing a bit of money, and not being too sure which direction the market is heading, I'm looking for some more stable returns now ..
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Old 11-17-2011, 12:49 AM   #2
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Sorry, don't invest in bonds so can't answer your questions specifically. Maybe this site will help?

Bond Basics: How To Read A Bond Table
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Old 11-17-2011, 12:59 AM   #3
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Thanks, that was actually the site I was looking at, but it doesn't answer questions 2,3,4.
I'm still doing some research surfing.. and I'm starting to think that all the numbers are interconnected.

So far what I've come up with is that even though the yield may look high (5.xx%), due to the fact that it is currently selling above it's actual price, when maturity comes, after calculating out the fact that I've paid more than the bond was worth, my actual yield will only be ~0.606%....

someone correct me if I'm wrong.. I'd really like a nice stable rate of 5% !
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Old 11-17-2011, 06:38 AM   #4
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That is correct, you would be earning 5.375% IF you bought it at the face value of $100 per. However, since the bond is trading at a premium over face value, your actual rate of return is lower than the posted rate. You could figure this out manually but typically you will see a "yield" column which shows what your actual rate of return is assuming you hold the bond to maturity.

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Old 11-17-2011, 07:02 AM   #5
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If I were to buy a 2 year bond, and within those 2 years interest rates increase a lot, and bond value becomes under-par, will I be paid out the 'par' value of the bond at maturity, or will I be paid the under-par value?


And conversely if interest rates decrease, and the bond value becomes valued premium to par I guess I could sell it for a profit as right?
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Old 11-17-2011, 07:30 AM   #6
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If you held to maturity you always get the par value of the bond back no matter where rates go as long as the issuer is able to pay it back. Only if you sold PRIOR to maturity and rates went higher after your purchase you will get less for your bonds than you paid.
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Old 11-17-2011, 07:30 AM   #7
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Quote:
Originally Posted by SiRV View Post
If I were to buy a 2 year bond, and within those 2 years interest rates increase a lot, and bond value becomes under-par, will I be paid out the 'par' value of the bond at maturity, or will I be paid the under-par value?


And conversely if interest rates decrease, and the bond value becomes valued premium to par I guess I could sell it for a profit as right?
Correct. If you think of a bond as a loan it helps.

As long as you hold the bond to maturity, you'll get back 100% of the value of the bond (assuming no default). So it helps to buy bonds with yields that are high enough to be worth holding onto in worst case. As you've learned, the yield is not the same as the coupon.

Lets say you have a loan for $100 that pays 10% return (coupon) for 1 year. I buy that loan from you for $105, what is my rate of return (yield) for the year? 10% x $100 = $110 - $105 = $5, $105/$5 = 4.8%

So for my $105 investment to buy your loan, I only get a 4.8% yield.

Thus in your case you're only getting a 0.6% yield, which is not worth it, you can get more in an online savings account.
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Old 11-17-2011, 11:00 AM   #8
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Correct. If you think of a bond as a loan it helps.

As long as you hold the bond to maturity, you'll get back 100% of the value of the bond (assuming no default). So it helps to buy bonds with yields that are high enough to be worth holding onto in worst case. As you've learned, the yield is not the same as the coupon.

Lets say you have a loan for $100 that pays 10% return (coupon) for 1 year. I buy that loan from you for $105, what is my rate of return (yield) for the year? 10% x $100 = $110 - $105 = $5, $105/$5 = 4.8%

So for my $105 investment to buy your loan, I only get a 4.8% yield.

Thus in your case you're only getting a 0.6% yield, which is not worth it, you can get more in an online savings account.
So do you buy mainly corporate bonds or government bonds? I'm going to start looking into bonds as well, getting killed in the stocks right now.
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Old 11-17-2011, 11:08 AM   #9
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Now that the basics are somewhat down... any advice on strip bonds?

I found one for SHAW (..i think if it had coupons attached it would be under municipal type bond) that is currently valued at 77$ to par ($100) with a maturity in 2019!!.. Just played with some numbers and if I drop around 11k into it today, maturity will make it 15k but its a BBB bond.. hummmmmmm
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Old 11-17-2011, 12:06 PM   #10
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So do you buy mainly corporate bonds or government bonds? I'm going to start looking into bonds as well, getting killed in the stocks right now.
I only invest in ETFs now for that exact reason. I have a balanced portfolio invested in 20 different ETFs in various categories and markets, including ETFs that hold bonds in both government and corporate bonds.
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Old 11-17-2011, 02:28 PM   #11
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I'll be honest, trading ETFs are beyond my financial knowledge. I know mutual funds are usually frowned on, but I'm wondering if investing in a fixed income mutual fund (e.g. RBC Bond fund) might be the way to go for me
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Old 11-17-2011, 03:16 PM   #12
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I'll be honest, trading ETFs are beyond my financial knowledge. I know mutual funds are usually frowned on, but I'm wondering if investing in a fixed income mutual fund (e.g. RBC Bond fund) might be the way to go for me
ETFs and MFs are essentially the same thing. Key differences are:

ETFs can be traded like stock. No minimum investment period like MFs.
ETFs have much lower fees, <0.5% vs >2% for MFs.
ETFs are balanced to match a market, while MFs are actively managed to try to beat the market. Thus you'd expect MFs to come out ahead, yet if we haven't learned you "cannot beat the market" yet I don't know when we will. I'd rather track the market than try to beat it.

ETFs are essentially a better version of a MF, and Scotia iTrade even lets you buy ETFs commission free like MFs! So you can trade them like stocks, without a commission!
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Old 11-17-2011, 04:05 PM   #13
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^Thanks for the info. Time do a little research!

quick questions, are dividends for ETF re-invested in shares like stocks, or are they strictly cash dividends?

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Old 11-17-2011, 07:08 PM   #14
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^Thanks for the info. Time do a little research!

quick questions, are dividends for ETF re-invested in shares like stocks, or are they strictly cash dividends?
There's ETF that reinvest dividends like MFs do, and there are ETFs that pay out a dividend.

I started with the Canadian Couch Potato, liked the idea, then researched ETFs that fit my portfolio. I'm due for a rebalance soon, and there's a bunch of new ETFs I have to look at.
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