Showing posts with label Corporate bond. Show all posts
Showing posts with label Corporate bond. Show all posts

Monday, June 24, 2013

BONDS; Alcoa bond for your retirement

Alcoa (Photo credit: Wikipedia)

You know I never advocate bond funds, yet, often times individual bonds fit nicely into an income investor’s diversified portfolio.   In this post, I profile a bond I bought yesterday. 

I want to remind you that I like bonds with short maturities, that cost less than par, have an interest rate that is better than a dividend, and whose underlying company has a good interest coverage ratio.  

Bonds with short maturities:

When you buy bonds, your goal is to build a portfolio of bonds with varying maturities.  Long bonds, those that mature in more than ten years, cost too much and do not pay enough income to make such a commitment.  You tie up your principle for too long a time. 

Short maturities, those between three and then years, are the sweet spot of bond investing today.  Everyone is worried that interest rates will explode over the next few years.   If that comes true, the value of bonds that you buy with coupon yields that are less than government treasuries will go down.   You will not want to sell your bond at a discount so you should hold it to maturity when you will get back your principle.   You can then reinvest your principle in another bond with a higher coupon yield.    If you keep the maturities short, you tie up your principle for less time and you can take advantage of rising interest rates.

Bonds priced at less than par:

Most investors are familiar with the concept of total return when we talk about buying stocks.  You expect dividend income but you also hope your principle will increase over time.   When you buy a bond at par and hold it to maturity, you will get back par.   Your total return is only the value of the interest payments.   

If you buy a bond that costs more than par and hold it to maturity, your return is even less than the value of the interest payments because you will get back only par which would be less than you paid.    You can see why I never buy bonds at a price greater than par.

If you buy a bond at a discount and hold it to maturity, your return is a combination of the interest payments and the increased value of your principle.  You get the capital gain difference between the discounted price you paid and par.   Sometimes, (and this happens more than you may think) the value of your bond increases enough that you can sell it at greater than par.  In circumstances of that type, your return includes the interest received while you held the bond and the capital gain.

Interest coverage ratio:

If you have not yet familiarized yourself with “interest rate coverage ratio,” you should do so now.   Interest coverage ratio is simple to find.   I use MSN Money to find this the interest coverage ratio of the company that has issued the bond.  Interest coverage ratio is a measure of how well a company can pay its interest payments.    Later in this post, I have provided a link to the MSN site.

Alcoa Aluminum Company – April 15, 2021 bond

Alcoa, symbol AA, is a dividend stock but their bonds are a more compelling investment.  AA issues bonds periodically and the bond I bought today (June 24, 2013) matures on April 15, 2021; this is just under eight years until maturity. 

This bond pays a coupon yield of 5.4%.  It sells at a discount; I paid $96.291.  At this price, the yield is about 6%.   In addition, if I hold the bond to maturity I will get back my principle plus $3.709.   

This bond is rated BBB-.   I put very little faith in the rating agencies; I do my own homework and I like to use the interest coverage ratio of the underlying company to determine if that company will be able to pay the interest and return to me the principle.   In the case of this bond, the interest coverage ratio of AA is 36.59.  This means the company has a good chance of paying interest to the tune of 36.59  times what they need to cover the interest payout.  This is an excellent margin for this company and makes the bond compelling to me.   If you want to see the data on MSN click here for the link.

AA 4/15/2021 5.4%
CUSIP 013817AV3
               $    100.000
               $      96.291
Coupon Yield
Yield to Maturity
AA D/E ratio
AA Interest Coverage Ratio

You need to know the CUSIP of the bond in order to buy it.   Many brokers, I use Schwab, will have these bonds in their inventory.   If you do not see this bond on your broker’s website, call their bond desk and ask for a price using the CUSIP.   See the table at right for this bond’s details.


Enhanced by Zemanta
Read more »

Monday, June 3, 2013

BONDS Cliffs Natural Resources CLF Bond for your retirement

Strategic Risk - Euro Bonds

It has been a while since I profiled a bond.   Today, I added this bond to my portfolio.  I like to shop for bonds on Mondays and I like a bond that is selling at a discount, is less than 10 years in maturity and is backed by a company with decent fundamentals.  Let’s look at how Cliffs Natural Resources’, symbol CLF, 2020 bond meets my needs for investment income.

Bonds priced on Monday:

Unlike stocks, bonds are a smaller universe for the ordinary investor.  Prices tend to be set on Monday.   This is when bond buyers go shopping.  So often in the past, I would find a bond I liked and by the time my client made a decision to buy, the inventory was no longer available or if it was the price increased and the yield decreased.

FINRA (Financial Industry Regulatory Authority) has a bond search feature.  It used to be quite good but they have revised it and I find it useful but not as rich as it used to be.  MarketAxess has a corporate bond edition (MarketAxess website) that individual investors can use to see a list of investment grade and high yield bonds.   Monday’s are a good time to look at their corporate bond edition.

In order to buy a bond, you have to know the “CUSIP.”  You can search your brokerage account but they tend to have a limited supply of bonds available to individual investors and they rarely have high yield bonds available online.   If you know the CUSIP, you can enter it to see if the bond is in their inventory; some brokers like Schwab will let you buy online.   Your alternative is to call the broker’s bond desk and ask them to shop for the particular bond.  They will get a price on the open market and you can decide if you want to buy the bond.

Buy at a discount:

Bonds are priced at what is known as par value or $100 per bond.  It is a little confusing because 10 bonds actually cost $10,000 which would be $1,000 per bond.  For the purpose of buying and selling, par is $100 per bond.    At par, the coupon yield is the effective yield.  A five percent coupon will pay you five percent every year until the bond matures; when the bond matures you get back your invested principle.

I like to buy at a discount which means the yield is higher than the coupon.   If the bond costs me $90 instead of $100, the five percent coupon is a yield of 5.55% over 10 years.  When the bond matues I also get a capital gain because I will get back $100 not just the $90 I paid for the bond.

If you buy at a premium, let's say you pay $110.00 for the bond, your yield will go down to 4.54% over 10 years and you will get back only $100 when the bond matures.   I do not like that kind of return.

Cliffs Natural Resources (CLF) 2020 bond:

The CUSIP for this bond is 18683KAB7.   The bond pays a coupon of 4.8%, it matures October 1, 2020 and today I paid $96.523 for each bond which translates into a yield of 5.38%.

I like a bond that matures in 5-10 years.   This bond matures in seven years and about four months.    Interest rates will be volatile during this time frame.  Some days the price of this bond will be up and other days it will be down.  As long as the company is solvent, it should both pay the coupon to me (bondholders are paid every single day they own the bond … unlike dividends) and the company should return $100 to me when the bond matures.

I cannot predict what interest rates will do.   It could be that in seven years, when this bond matures, I can replace it with a bond that pays 10%.   Do not laugh at that prospect because this happened in the past during the hyperinflation period in the 1980’s.   Equally possible, I may not find a bond to replace this one with a yield that is as good as 5.38%.   You have to weigh how much you need 5.38%.   Right now, I need that yield and I like the potential capital gain.

CLF, had one terrible quarter where they took loses.  They are in the metals, mining, and coal business and the coal part has not been pretty.   Yet, fundamentally, I find this company a pretty safe bet.   Their book value is $37 per share yet it trades at $17.92 per share.   Their D/E ratio is .60 which is very healthy.   Finally, their interest coverage ratio is 3.4. 

Do you own homework, and then decide if a bond of this type will fit into the income producing portion of your portfolio.


Enhanced by Zemanta
Read more »

Thursday, August 16, 2012

Trade bonds? Is this a good idea?

If you are reading this post, thinking you want to make money trading bonds, you probably should read another blog.    This blog is for income investors.  However, trading bonds can be a part of income strategy; if you never pay more for a bond than it will return to you at maturity; you can make money trading bonds and earn the interest while you wait.
Read more »