Buying and Trading Bonds
Newly issued bonds along with those being traded in the secondary market are available from stockbrokers and from some banks. Treasuries, though are sold at issue directly to investors without any intermediary or any commission. the Federal reserve Banks handle transactions in new treasury issues, bonds, bill, and notes. In-order to buy through the Federal Reserve, a investor needs to establish a treasury direct account that will keep records of the transactions, and it pay interest directly to the investor bank account. When the treasury issue is held to maturity, the par value is repaid directly as well.
Price is a factor that keeps individual investors from investing in bonds. While par value of a bond is usually around a $1000, bonds are often sold in bundles or packages that require a much larger minimum investment. High individual bond prices also limit the amount of diversification an investor can achieve. As a result, many people prefer bond funds, and many of the bonds themselves are bought by larger institutional investors.
Most already-issued bonds are traded over-the-counter. Bond dealers across the country are connected via electronic display terminals that give them the latest information on bond prices. A broker buying a bond uses a terminal to find out which dealer is currently offering the best price and then he calls that dealer to negotiate. Brokerages also have inventories of bond that they would like to sell to clients that are looking for bonds of particular maturities or yields. Sometimes investors make out better buying bonds their brokers already own.
While many newly issued bonds are sold without commission expense to the buyer, because the issuer absorbs the cost. The amount an investor pays to buy an older bond depends on the commission earned by the stockbroker involved, full service or discount, and the size of the markup that's added to the bond. markups are not officially regulated, and the total amount is not reported on confirmation orders, so charges can be excessive. However, investors that trade bonds to take advantage of fluctuating interest rates may find that their profits outweigh the costs of trading.
If you would like to learn the abc of options trading or you would like to learn some useful options trading tips then visit: http://www.learningoptionstrading.com
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Saturday, August 15, 2009
Monday, June 29, 2009
Convertible Bonds
A convertible debt that can be converted into shares shares of common stock is known as a convertible corporate bond. The pricing or conversion ratio is based on a fixed convert price and the par value amount of bonds owned.
If an investor owns $1000 par value of a corporate bond that has a convertible price of 50 can own 20 shares of stock (1000 divided by 50). The pricing of these bonds tends to trade near par, since the price or interest rate risk with these bonds is less because of the conversion feature.
Normally when interest rates rise, bond prices go down. That is true with most bonds. Convertible securities offer investors a way out of the bond into stock of the company. That fact keeps the pricing market fairly stable on these bonds.
================================================================================
Book Recommendation - Fixed Income Securities: Tools for Today's Markets, Second Edition, University Edition
Convertible bonds are bonds issued by corporations that are backed by the corporations' assets. In case of default, the bondholders have a legal claim on those assets. Convertible bonds are unique from other bonds or debt instruments because they give the holder of the bond the right, but not the obligation, to convert the bond into a predetermined number of shares of the issuing company. Therefore, the bonds combine the features of a bond with an "equity kicker" - if the stock price of the firm goes up the bondholder makes a lot of money (more than a traditional bondholder). If the stock price stays the same or declines, they receive interest payments and their principal payment, unlike the stock investor who lost money.
Why are convertible bonds worth considering? Convertible bonds have the potential for higher rates while providing investors with income on a regular basis. Consider the following:
1. Convertible bonds offer regular interest payments, like regular bonds.
2. Downturns in this investment category have not been as dramatic as in other investment categories.
3. If the bond's underlying stock does decline in value, the minimum value of your investment will be equal to the value of a high yield bond. In short, the downside risk is a lot less than investing in the common stock directly. However, investors who purchase after a significant price appreciation should realize that the bond is "trading-off-the-common" which means they are no longer valued like a bond but rather like a stock. Therefore, the price could fluctuate significantly. The value of the bond is derived from the value of the underlying stock, and thus a decline in the value of the stock will also cause the bond to decline in value until it hits a floor that is the value of a traditional bond without the conversion.
4. If the value of the underlying stock increases, bond investors can convert their bond holdings into stock and participate in the growth of the company.
During the past five years, convertible bonds have generated superior returns compared to more conservative bonds. Convertible bonds have generated higher returns because many companies have improved their financial performance and have their stocks appreciate in value.
Convertible bonds can play an important role in a well-diversified investment portfolio for both conservative and aggressive investors. Many mutual funds will invest a portion of their investments in convertible bonds, but no fund invests solely in convertible bonds. Investors who want to invest directly could consider a convertible bond from some of the largest companies in the world.
About the author: Tony Reed is the author of " Upside potential with convertible bonds", please visit his website Bonds trading & Bonds market for more information.
Bond Broker Job
Selling Bonds
If an investor owns $1000 par value of a corporate bond that has a convertible price of 50 can own 20 shares of stock (1000 divided by 50). The pricing of these bonds tends to trade near par, since the price or interest rate risk with these bonds is less because of the conversion feature.
Normally when interest rates rise, bond prices go down. That is true with most bonds. Convertible securities offer investors a way out of the bond into stock of the company. That fact keeps the pricing market fairly stable on these bonds.
================================================================================
Book Recommendation - Fixed Income Securities: Tools for Today's Markets, Second Edition, University Edition
Convertible bonds are bonds issued by corporations that are backed by the corporations' assets. In case of default, the bondholders have a legal claim on those assets. Convertible bonds are unique from other bonds or debt instruments because they give the holder of the bond the right, but not the obligation, to convert the bond into a predetermined number of shares of the issuing company. Therefore, the bonds combine the features of a bond with an "equity kicker" - if the stock price of the firm goes up the bondholder makes a lot of money (more than a traditional bondholder). If the stock price stays the same or declines, they receive interest payments and their principal payment, unlike the stock investor who lost money.
Why are convertible bonds worth considering? Convertible bonds have the potential for higher rates while providing investors with income on a regular basis. Consider the following:
1. Convertible bonds offer regular interest payments, like regular bonds.
2. Downturns in this investment category have not been as dramatic as in other investment categories.
3. If the bond's underlying stock does decline in value, the minimum value of your investment will be equal to the value of a high yield bond. In short, the downside risk is a lot less than investing in the common stock directly. However, investors who purchase after a significant price appreciation should realize that the bond is "trading-off-the-common" which means they are no longer valued like a bond but rather like a stock. Therefore, the price could fluctuate significantly. The value of the bond is derived from the value of the underlying stock, and thus a decline in the value of the stock will also cause the bond to decline in value until it hits a floor that is the value of a traditional bond without the conversion.
4. If the value of the underlying stock increases, bond investors can convert their bond holdings into stock and participate in the growth of the company.
During the past five years, convertible bonds have generated superior returns compared to more conservative bonds. Convertible bonds have generated higher returns because many companies have improved their financial performance and have their stocks appreciate in value.
Convertible bonds can play an important role in a well-diversified investment portfolio for both conservative and aggressive investors. Many mutual funds will invest a portion of their investments in convertible bonds, but no fund invests solely in convertible bonds. Investors who want to invest directly could consider a convertible bond from some of the largest companies in the world.
About the author: Tony Reed is the author of " Upside potential with convertible bonds", please visit his website Bonds trading & Bonds market for more information.
Bond Broker Job
Selling Bonds
Saturday, May 16, 2009
Type of Municipal Issues
There are two main types or ways a municipality can guarantee or back it's bond. One way is through the taxing power of the municipality. This would be called a General Obligation Bond or G.O. Bond. Another is called a Revenue Bond, which uses specific revenue sources to secure the issue.
General Obligation Bonds
These are the most common and normally the better rated issues. A state raising money and backing the bond issue with higher income or sales tax would be considered a G.O. Bond. A school district rasing money through a broker dealer on a municipal bond and securing the bond investors with school or property tax revenue is considered a General Obligation bond as well. Since taxes are the most secure source for money now and in the future, some investors prefer them over most revenue issues.
Revenue Bonds
Issues that rely on the revenue producing ability of a facility or from the issuer through other means are Revenue Bonds. There are several types of issuers. These would include:
Transportation - Bridges, Tolls, and Airports would be good examples
Health care - City or county hospitals
Utility Companies - Electric or water companies could assess usage increases to raise money.
Industrial - Some municipal issuers will work with private companies and use the company's lease payments to the city as a revenue source for bond issues.
General Obligation Bonds
These are the most common and normally the better rated issues. A state raising money and backing the bond issue with higher income or sales tax would be considered a G.O. Bond. A school district rasing money through a broker dealer on a municipal bond and securing the bond investors with school or property tax revenue is considered a General Obligation bond as well. Since taxes are the most secure source for money now and in the future, some investors prefer them over most revenue issues.
Revenue Bonds
Issues that rely on the revenue producing ability of a facility or from the issuer through other means are Revenue Bonds. There are several types of issuers. These would include:
Transportation - Bridges, Tolls, and Airports would be good examples
Health care - City or county hospitals
Utility Companies - Electric or water companies could assess usage increases to raise money.
Industrial - Some municipal issuers will work with private companies and use the company's lease payments to the city as a revenue source for bond issues.
Trading Treasuries - Trade for Treasury Ticks
The institutions that have strict policy guidelines on the bonds that they can buy are Banks, Credit Unions and Municipalities.
The spreads on Treasuries make them difficult to sell or “mark up” more than a few “ticks” to most sophisticated banks and institutions. A tick is 1 point in price. Government bonds are quoted in 32nds.
An example of a treasury bond would be: Bid 101-16 Ask: 101-24. If your client wanted to buy $10,000 of this treasury bond, you would see the price to you at 101-24 (24/32). 24/32 = .75. So the price is really 101.75 or $10,175. Each point represents $10 for every $1000 par bond. For $10,000, each point is worth $100. All bonds trade at a minimum of 1000. Institutions normally buy $250,000 up to tens of millions per trade. So, our example of a $10,000 trade really isn’t realistic and would not be worth your time. A “tick” by the way, is if the price went up to 101-25.
Trading for a few “ticks” on $100,000 would make you very little. If you factor in ticket charges, you might make $100 on the trade. You only present treasuries if it’s non competitive, or if the client is investing at least $1,000,000, otherwise it won’t make you much. If your client deals with 3 other brokers on treasuries, you will all be fighting for very little money. It’s very easy to get a quick quote on treasuries. Every major dealer owns them, and they can be purchased quickly. You or your trader will contact a major brokerage firm (Merrill Lynch, UBS etc.) and buy them. Not much money yes, still, it is assets you are controlling, and it could be used as available money to swap out of into a better investment for the client.
Treasuries are very safe of course, that’s why they are bought. Only buying treasuries will diminish the rate of return of the entire portfolio, if that is their only or main investment vehicle. Treasuries offer flexibility though. The market values on them will normally hold up well over time. They are very liquid and can be traded instantly. You should sell them only as “time bucket” or maturity gap placing.
If you see the bank has nothing maturing in the first half of a year for instance, you can recommend treasuries there too. Remember, institutions are looking for best price, but also good advice. The medium sized banks ($50 million - $500 million assets) will value good planning and thoughtful recommendations over dealing with 10 brokers all day. The larger institutions are more complicated, and require more price awareness. They think they have the ideas covered and you may have to just be an order taker with them.
The spreads on Treasuries make them difficult to sell or “mark up” more than a few “ticks” to most sophisticated banks and institutions. A tick is 1 point in price. Government bonds are quoted in 32nds.
An example of a treasury bond would be: Bid 101-16 Ask: 101-24. If your client wanted to buy $10,000 of this treasury bond, you would see the price to you at 101-24 (24/32). 24/32 = .75. So the price is really 101.75 or $10,175. Each point represents $10 for every $1000 par bond. For $10,000, each point is worth $100. All bonds trade at a minimum of 1000. Institutions normally buy $250,000 up to tens of millions per trade. So, our example of a $10,000 trade really isn’t realistic and would not be worth your time. A “tick” by the way, is if the price went up to 101-25.
Trading for a few “ticks” on $100,000 would make you very little. If you factor in ticket charges, you might make $100 on the trade. You only present treasuries if it’s non competitive, or if the client is investing at least $1,000,000, otherwise it won’t make you much. If your client deals with 3 other brokers on treasuries, you will all be fighting for very little money. It’s very easy to get a quick quote on treasuries. Every major dealer owns them, and they can be purchased quickly. You or your trader will contact a major brokerage firm (Merrill Lynch, UBS etc.) and buy them. Not much money yes, still, it is assets you are controlling, and it could be used as available money to swap out of into a better investment for the client.
Treasuries are very safe of course, that’s why they are bought. Only buying treasuries will diminish the rate of return of the entire portfolio, if that is their only or main investment vehicle. Treasuries offer flexibility though. The market values on them will normally hold up well over time. They are very liquid and can be traded instantly. You should sell them only as “time bucket” or maturity gap placing.
If you see the bank has nothing maturing in the first half of a year for instance, you can recommend treasuries there too. Remember, institutions are looking for best price, but also good advice. The medium sized banks ($50 million - $500 million assets) will value good planning and thoughtful recommendations over dealing with 10 brokers all day. The larger institutions are more complicated, and require more price awareness. They think they have the ideas covered and you may have to just be an order taker with them.
Thursday, January 15, 2009
Interest Earning Arbitrage - Bond Market Arb
People and investors who own bonds can profit from spread opportunities that present themselves in the credit and bond markets. This market best shows itself in corporate securities.
arbitrage opportunities in bond market
Arbitrage refers to buying an instrument or a commodity in one market and simultaneously selling it in another, making clear and risk less profit. Arbitrage opportunities are available when markets are not efficient. A person who makes risk less profit by using market inefficiencies is called an arbitrager.
Consider a 1 year maturity bond with face value of Rs100, coupon rate of 10%, paying coupon semi annually and bank interest rate is 5% pa.
Present value of the cash flows from this bond is
5/1.025 + 105/(1.025)2 = 104.82
If price of this bond is Rs100 in the market, one can borrow Rs100 from a bank and buy this bond. He will be able to pay Rs5 once he receives first coupon on this bond. By this time his outstanding amount will be 97.5 (100+100*2.5/100 - 5). At the end of one year he will receive Rs105 (principal + last coupon) which can be used to pay bank’s debt of Rs99.94 (97.5*1.025). He will make risk less profit of Rs 5.06
To exploit this situation every one tries to buy this bond by borrowing from banks to get risk less profit. As the demand for this bond increases the price also increases gradually to an extent that there won’t be any arbitrage opportunity. This happens in very less time in an efficient market giving less time for arbitragers to act.
The Handbook of Fixed Income Securities
arbitrage opportunities in bond market
Arbitrage refers to buying an instrument or a commodity in one market and simultaneously selling it in another, making clear and risk less profit. Arbitrage opportunities are available when markets are not efficient. A person who makes risk less profit by using market inefficiencies is called an arbitrager.
Consider a 1 year maturity bond with face value of Rs100, coupon rate of 10%, paying coupon semi annually and bank interest rate is 5% pa.
Present value of the cash flows from this bond is
5/1.025 + 105/(1.025)2 = 104.82
If price of this bond is Rs100 in the market, one can borrow Rs100 from a bank and buy this bond. He will be able to pay Rs5 once he receives first coupon on this bond. By this time his outstanding amount will be 97.5 (100+100*2.5/100 - 5). At the end of one year he will receive Rs105 (principal + last coupon) which can be used to pay bank’s debt of Rs99.94 (97.5*1.025). He will make risk less profit of Rs 5.06
To exploit this situation every one tries to buy this bond by borrowing from banks to get risk less profit. As the demand for this bond increases the price also increases gradually to an extent that there won’t be any arbitrage opportunity. This happens in very less time in an efficient market giving less time for arbitragers to act.
The Handbook of Fixed Income Securities
Tuesday, October 7, 2008
Neutral: Top Corporate Bond vs. High Yield Bond
Finance Portfolio Research & Analysis for Sept. 8-12, 2008
From our foundational USA research division and the subsequent USA strategy analysts, the following financial analysis excerpts are from revisions recently completed on USA based investment portfolios:
SCR Step 1 - Analysis: From No. D1 (USA) Financial Portfolio Research Revision - [iShares] G. Sachs Invest Top Corporate Bond (LQD) vs. [iShares] High Yield Corporate Bond (HYG):
(1) Observation - Relative Strength: Results in the relative strength analysis of LQD versus HYG indicate that the Top Corporate Bond (LQD) is outperforming / neutral to High Yield Corporate Bond (HYG) on a relative basis. This is a continuation that began in late July. The importance of this relative strength change is that it is with a positive / neutral price path for LQD. The increase in relative strength during much of June and July was from the price path of LQD simply not dropping as fast as the one for HYG.
(2) Observation - Regression: Comparison of the linear regression to the time-series that has a 3-period forward shift finds the following formation: Both the price path and the linear regression is equal to the time-series. Since the linear regression provides the "best fit" to the price path, this has neutral implications for Top Corporate Bond (LQD). However, and of concern, is the weakness of some of the indicators.
(3) Observation - Price Performance: Top Corporate Bond (LQD) shows a continuation of a neutral price path (producing a fairly flat overall slope) on weak indicators.
[Reference Charts: D1-1 (relative strength); AD1A-1a (regression); AD1B-1b (price)]
SCR Step 2 - Implication & Strategy: (1) Possible Implication: The summary of the stated observations for LQD is Neutral, and has Neutral implications.
Additional considerations: First, for most investors, a diversified investment portfolio approach combining stocks, bonds, money market securities, etc., is optimal. While financial diversification cannot protect against a loss from a declining market, it can reduce the volatility of the overall portfolio.
Second, with the globalization of information technologies, college education becomes a prerequisite to most careers. Thus, a goal of successful investing in a variety of assets becomes crucial in providing the upper level education necessary for the future of your children. In consideration of that goal, studying the information available on this site, which has been kind enough to host our research in this article, will help. At www.StrategicCapitalResearch.com, we provide additional finance educational materials to what you find here in both investment books and videos. Between the two sites, you should be able to find enough information to get started toward achieving your education investment goals.
Third, to the above analysis excerpt, the usual disclaimers apply. Since all Strategic Capital Research publications provide research that is conducted using historical data, a reminder needs to be made that the analysis of past market reactions cannot predict future market actions. In particular, no amount of historical data can predict the sudden changes that occasionally occur in financial markets. Finally, the reference chart numbers refer to both the portfolios and their completed auxiliary analyses that are located at
www.strategiccapitalresearch.com/research.html.
The SCR Analysts represent the collective voice of the researchers at Strategic Capital Research (SCR). We provide global financial analyses, and subsequent strategies, from countries to companies. Copyright 2007-2008.
[SCR] Research & Analysis with Free Excerpts at Strategic Capital Research, LLC.
Top Bond and Finance Books
From our foundational USA research division and the subsequent USA strategy analysts, the following financial analysis excerpts are from revisions recently completed on USA based investment portfolios:
SCR Step 1 - Analysis: From No. D1 (USA) Financial Portfolio Research Revision - [iShares] G. Sachs Invest Top Corporate Bond (LQD) vs. [iShares] High Yield Corporate Bond (HYG):
(1) Observation - Relative Strength: Results in the relative strength analysis of LQD versus HYG indicate that the Top Corporate Bond (LQD) is outperforming / neutral to High Yield Corporate Bond (HYG) on a relative basis. This is a continuation that began in late July. The importance of this relative strength change is that it is with a positive / neutral price path for LQD. The increase in relative strength during much of June and July was from the price path of LQD simply not dropping as fast as the one for HYG.
(2) Observation - Regression: Comparison of the linear regression to the time-series that has a 3-period forward shift finds the following formation: Both the price path and the linear regression is equal to the time-series. Since the linear regression provides the "best fit" to the price path, this has neutral implications for Top Corporate Bond (LQD). However, and of concern, is the weakness of some of the indicators.
(3) Observation - Price Performance: Top Corporate Bond (LQD) shows a continuation of a neutral price path (producing a fairly flat overall slope) on weak indicators.
[Reference Charts: D1-1 (relative strength); AD1A-1a (regression); AD1B-1b (price)]
SCR Step 2 - Implication & Strategy: (1) Possible Implication: The summary of the stated observations for LQD is Neutral, and has Neutral implications.
Additional considerations: First, for most investors, a diversified investment portfolio approach combining stocks, bonds, money market securities, etc., is optimal. While financial diversification cannot protect against a loss from a declining market, it can reduce the volatility of the overall portfolio.
Second, with the globalization of information technologies, college education becomes a prerequisite to most careers. Thus, a goal of successful investing in a variety of assets becomes crucial in providing the upper level education necessary for the future of your children. In consideration of that goal, studying the information available on this site, which has been kind enough to host our research in this article, will help. At www.StrategicCapitalResearch.com, we provide additional finance educational materials to what you find here in both investment books and videos. Between the two sites, you should be able to find enough information to get started toward achieving your education investment goals.
Third, to the above analysis excerpt, the usual disclaimers apply. Since all Strategic Capital Research publications provide research that is conducted using historical data, a reminder needs to be made that the analysis of past market reactions cannot predict future market actions. In particular, no amount of historical data can predict the sudden changes that occasionally occur in financial markets. Finally, the reference chart numbers refer to both the portfolios and their completed auxiliary analyses that are located at
www.strategiccapitalresearch.com/research.html.
The SCR Analysts represent the collective voice of the researchers at Strategic Capital Research (SCR). We provide global financial analyses, and subsequent strategies, from countries to companies. Copyright 2007-2008.
[SCR] Research & Analysis with Free Excerpts at Strategic Capital Research, LLC.
Top Bond and Finance Books
Tuesday, August 26, 2008
Call Protection - Bond Call Date
Bonds that are callable carry more yield risk or reinvestment risk if they are called. This is because most bonds are called when interest rates are lower. Call protection is the period of time between when the bond is bought to when the first call date occurs.
The longer the callable date ism the greater the period of call protection to the bondholder. This will usually result in a higher price - lower yield to purchase than a bond with a fast call date approaching. The risk is greater on the near date bond and so the market will price that in with a cheaper price. Both of these features has a place in most portfolios.
The bonds with longer call protection will give an investor more predictability and stablity but yield will be lower vs. non-callable fixed income securities. There is always a risk to price component to the investor and the issuer.
Issuers would prefer to have shorter protection periods as it limits their refinancing ability when they would want to call a product back.
Yield to call and yield to maturity would be based on more than the protection period. The redemption price the issuer is paying and the price the investor paid for the issue would have to looked at to truly determine if the yield to maturity would be higher or lower than call yield.
Bond Investment Books
The longer the callable date ism the greater the period of call protection to the bondholder. This will usually result in a higher price - lower yield to purchase than a bond with a fast call date approaching. The risk is greater on the near date bond and so the market will price that in with a cheaper price. Both of these features has a place in most portfolios.
The bonds with longer call protection will give an investor more predictability and stablity but yield will be lower vs. non-callable fixed income securities. There is always a risk to price component to the investor and the issuer.
Issuers would prefer to have shorter protection periods as it limits their refinancing ability when they would want to call a product back.
Yield to call and yield to maturity would be based on more than the protection period. The redemption price the issuer is paying and the price the investor paid for the issue would have to looked at to truly determine if the yield to maturity would be higher or lower than call yield.
Bond Investment Books
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