Bond Yield

T Bonds - Treasury Bond Trading

2011-11-30T19:03:00.000-08:00

American Investment Training provides free information on all investment securities inckuding T Bonds. Treasury Bonds can be a great investment for people looking to put money away especially when short term interest rates are low.

Treasury Bonds are long term Government securities. Their maturities are over 10 years out to 30 years and are often used in block trading. They are backed by the US Government, thus they carry no credit risk. Their yields reflect interest rates and supply and demand.

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Treasury Bonds

Yield To Call YTC

2011-09-14T06:19:00.000-07:00

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Bond Yield To Call

If a bond is callable, it is very important to be aware of the yield to call. If the investment is called early at a lower price than what you paid, your YTC will be lower. If the call price is higher, then yield is higher.
Usually it is best for call dates to be as far out as possible for an investor. Normally a called bond is an unwanted occurance for an investor. Bonds are usually called when interest rates decline, so an investor will be forced to invest the proceeds elsewhere at lower rates.

Callable bonds are priced to the call date or the maturity date. Bond brokers will price the bond to the call when it's a premium, and price to the yield to maturity when it is a discount bond.

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What is a subordinated Debenture

2011-07-03T18:19:00.001-07:00

A bond that issues where the interest is higher than the company's other bonds, but the issue has a lower priority if the company goes out of business is called a subordinated debenture.

The interest paid to this debt is guaranteed, but if the company liquidates, these debts are the lowest creditor priority. Investors would have to wait for other obligations, including secured and debenture holders to be paid.

CMO Investments

2010-11-10T03:57:00.000-08:00

Collateralized Mortgage Obligations or CMO's are a series of bonds backed by an agency and their mortgage backed securities. These investments are AAA rated and pay monthly principal and interest.

Collateralized Mortgage Obligations differ from pass through securities in that they have different types of paying bonds within the CMO. There are many types and tranches to evaluate - each with it's own bond risk.

A CMO has different payment timing risk depending on the type of bond you own. Some offer more protection than others from prepayment or extension risk. These bonds have a more predicatable duration to the bondholder vs. a pass through agency bond. Some CMO's can pay off faster than others.

Collateralized Mortgage Obligations are generally meant for institutional investors or wealthy bond investors. The money invested, while earning monthly income - can take a while if interest rates rise. When interest rates rise, a these bonds will pay slower. The refinancing that normally can happen with mortgage pools will slow down or stop when interest rates or bond yields rise.

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2010-02-28T10:18:00.000-08:00

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Buying and Trading

2009-08-15T18:08:00.000-07:00

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.

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Convertible Bonds

2009-06-29T17:35:00.000-07:00

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.

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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.

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Bond Broker Job

Selling Bonds

Type of Municipal Issues

2009-05-16T14:13:00.000-07:00

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.

Trading Treasuries - Trade for Treasury Ticks

2009-05-16T14:07:00.000-07:00

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.

Interest Earning Arbitrage - Bond Market Arb

2009-01-15T18:31:00.000-08:00

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

Neutral: Top Corporate Bond vs. High Yield Bond

2008-10-07T04:03:00.000-07:00

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

Call Protection - Bond Call Date

2008-08-26T16:53:00.000-07:00

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

Accrued Interest - Bond Yield Accrued

2008-06-26T16:41:00.000-07:00

Bonds pay interest at the coupon rate on a set schedule from issuance through maturity. The interest cycle can be monthly, quarterly, semi-annually, annually or at maturity. When a bond is sold in the secondary market, it is uncommon for the settlement to take place exactly on an interest payment date (Semi-annual example: there are two interest payments per year). At settlement, the buyer pays the seller the purchase price PLUS interest earned (“accrued”) by the seller from the last interest payment, up to, but not including the settlement date. This is referred to as the “accrued interest”.

BOND YIELD discussion

Step Up Agency Bond - Step Up Adjustable Bonds

2008-06-26T13:43:00.000-07:00

A STEP UP Agency debenture is a bond that has a fixed coupon rate for a period of time. It is then available to be “called” (redeemed @par) by the issuing Agency. If the note is not called, the coupon will then STEP-UP (adjust) to a new coupon rate. These various coupons and the amount of time between the step dates are established at the issuance and will not be changed over the life of the bond. (A Step-Up Bond is not considered a true floating rate security because the coupons are pre-determined at issuance and do not “float” against a market index).

Keep in mind that each STEP-UP bond will have its own specific call features and coupon step-up features. Some recent issues have had multiple step-up dates with the coupon rate changing each year through maturity if he bond is not called. In any event, the best method of evaluation is to examine the effective yield to each available call date (taking into account the multiple coupons) and then comparing to alternative investments.

Book Recommendations

The Handbook of Fixed Income Securities

Bond Interest Rates - Government Backed Bond Pricing

2008-02-19T09:47:00.000-08:00

Bonds are guaranteed by the issuer. The issuer promises the payment of timely interest and the return of your principal at the end. The end date is called the maturity date. Barring any unforeseen default by an issuer which is rare, your principal and interest is secure. Bonds do not have to be held by an investor for the full term. There is an active trading market with bonds. Bonds can be bought and sold in the market resulting in profits or losses. Bond prices fluctuate just like any security does.

The current and future price of a bond depends on a few factors. The most important factor is interest rates and whether they have gone up or down since a bond was purchased. For instance, if you buy our 6% bond for 5 years today and you paid $1000 par value for 1 bond, your hope is that interest rates decline after the bond is bought. If interest rates declined to 5%, your bond will be valued higher and thus trade higher in price. New issues of bonds would only be coming out at 5%. Your 6% bond will be worth more. Conversely, if interest rise to 7%, your 6% bond will be worth less and thus will trade at a discount. These fluctuations in price are mostly relevant only when a bond may be sold. If a bond is bought and held till the maturity date, regardless of interest rate movements, your rate of return is fixed.

Tax Free Municipals

There are many factors that effect a bonds price and value. Bonds have credit ratings on them. Ratings agencies will rate a bond issue so an investor knows the credit quality of an issue. Standard and Poors (S&P) and Moodys are the 2 main ratings companies. A U.S. Government bond will have a AAA rating automatically. These bonds will typically not yield as high of a return as lower rated bonds. AAA is the highest, but you can buy lower rated bonds without really worrying about the credit quality of an issuer, to a point. Bonds that are rated Baa/BBB and higher are considered “Investment Grade”. These bonds, although not AAA are hardly “Junk Bonds” and thus should pay off fine. The length of the bond will effect the price as well now and in the future. If the investment is long term, it will be more susceptible to interest rate movements and thus change in price more often. The longer term bonds will provide a greater rate of return because of these risks.

Bond Trader

US Treasury Trading - Treasury Notes, Bonds

2008-01-29T12:38:00.000-08:00

The following are trading examples of treasury notes, bonds , strips and other US Government based securities trades.

A customer places an order to buy ten 4% US Treasury Notes on Monday August 3rd for regular way settlement. This trade will settle on:

A) Monday August 3rd
B) Tuesday August 4th
C) Wednesday August 5th
D) Thursday August 6th

B: All US Government Securities, including Treasury Notes, settle on the next business day. This trade will settle on Tuesday August 4th.

Treasury Notes pay interest:

A) Monthly
B) Semi annually
C) Quarterly
D) At maturity

B: Treasury notes and treasury bonds pay interest semi annually. Treasury bills are non interest bearing and pay par value at maturity.

A customer wants to invest in a bond that has the least amount of reinvestment risk. Which of the following would be the most appropriate?

A) Treasury bond
B) Treasury note
C) Treasury STRIP
D) None of the above

C: Reinvestment risk occurs with income paying investments that are reinvested into lower paying vehicles. Treasury STRIPs are zero coupon bonds issued by the US Government. They do not pay any income or interest during the term of the bond. There would be no reinvestment risk, since there is no income to reinvestment.

Bond Investing Books

Callable Bonds, Accrued Interest, 0 Coupon

2008-01-29T11:49:00.000-08:00

Assuming all of the following bonds from the same issuer are callable now, which one would most likely get called first?

A) 8% maturing 1-15-2016
B) 8% maturing 1-15-2006
C) 4% maturing 1-15-2012
D) 4% maturing 1-15-2006

A: Bonds with the highest coupon rates would be the first to most likely get called. The issuer will look to issue new debt at a lower rate. Since there are two 8% bonds, the one that would most likely get called, would be the issue with the longest maturity. This is because the bond is potentially more expensive with the amount of years it has compared to the shorter one.

A customer sells a 6% corporate bond on Tuesday October 4th for regular way settlement. The bond pays interest on July 1st and January 1st. How many days of accrued interest is this customer owed?

A) 98
B) 97
C) 96
D) 57

C: Accrued interest is the interest that is due a seller of a bond since the last day they were paid. Corporate bonds pay on a 30 day month/360 day year. They also settle on the 3rd business day following the trade date (T+3). The trade settles on Friday October 7th. The last pay date was July 1st. The customer is owed 30 days for July, 30 days for August , 30 days for September and 6 days for October. You do not include the settlement date of the 7th.

Which of the following debt securities are direct obligations of the U.S. Government?

A) GNMA
B) FNMA
C) Commercial paper
D) Secured corporate bonds

Correct answer is A: Government National Mortgage Association (GNMA) is a direct obligation of the Government. FNMA is a private agency. Commercial paper and all corporate debt are only guaranteed by the issuing company.

Which of the following securities have initial maturities of one year or less?

I Treasury notes
II Treasury bills
III Commercial paper
IV Treasury stock

A) I and IV
B) I, II and III
C) II and III
D) I, II and IV

C: Treasury bills have initial maturities of 1 month, 3 months and 6 months. Commercial paper has maturities of 270 days or less. Treasury notes have maturities out to two years. Treasury stock is not a debt security and has no maturity.

Zero coupon bonds pay interest:

A) At maturity
B) Semi annual
C) Monthly
D) None of the above

D: 0 Coupon bonds do not pay interest at all. The rate of return is based on the discount price that is paid, and the par that is received at maturity.

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Yield Curve - Positive, Inverted Treasury Bond Curve

2008-01-28T07:33:00.000-08:00

The current yield curve measures where short term and long term interest rates are currently trading. This curve is comprised of US Treasury securities.

A positive or ascending yield curve is when short term yields are lower than long term treasury yields. This normally how an interest rate curve shoudl look during most normal economic conditions

Inverted

Sometimes interest rates may be trading where the yield curve is inverted. This means that short term interest rates are trading higher than longer term yields.

If the Federal Reserve Board (FRB) agressively tightens short term money (lowers interest rates), then short term rates can rise - creating a possible inverted curve.

Most other bonds and debt securities are proced off of current treasury rates. Corporate and other bonds are priced "above treasuries". Treasuries have the least amount of credit risk, so other bonds will always trade higher and above the current yield curve, creating a yield spread.

Bond Price and Yield Calculation

2007-10-08T06:20:00.000-07:00

PRICE

The price paid for a bond is based upon the general level of interest rates at the time of purchase. When a security is issued, the coupon rate will be reflective of the current interest rate environment, and the price will typically be at or close to par (100.00% of face value). After the bond is issued, if interest rates go down, the price of the bond will go up (to more than 100.00% of face value). This happens because a new bond issued in the lower interest rate environment would have a lower coupon rate, and trade at or close to par. The investor selling the older bond (with a higher coupon rate) would demand a higher price (a “premium”). for the bond (it has a higher coupon, pays more interest and, therefore is more valuable). Conversely, after a bond is issued, if interest rates go up, the price for the security will decline (to a “discount”) because its coupon will be less valuable. Of course, no investor is obligated to sell a bond prior to maturity regardless of whether interest rates rise or fall.

YIELD

The price paid by the buyer will equate to an “effective yield” to the bond’s stated maturity. The effective yield to maturity is calculated using a mathematical combination of the price paid, the coupon interest rate and the remaining term to maturity.

How To Sell Bonds

Mortgage Backed Securities, CMO Bonds and Yield

2007-10-08T06:17:00.000-07:00

Mortgage backed securities offer the best alternative to decreased loan demand. Pass throughs, CMO’s and adjustable rate MBS’s are paid to the bank just like a loan that the banks has made for a mortgage. If a person takes out a $250,000 mortgage, the customer is paying back the bank monthly with principle and interest. As you know, if you own a home, your initial payments are mostly INTEREST in the early years. A mortgage backed security, if it is a new issue will operate the same way. As you learned in the product section, the payments on MBS’s are based on the average coupon of the underlying mortgages. If the Weighted Average Coupon (WAC) is low, the payments will be slower because people will not be refinancing as much.

Geography also plays a part. You want to know where the mortgages are, that the agency is issuing the bond off of. California and New York for instance, has more people moving than states like Nebraska or Alabama, where the population is more settled. The more transient a state, the faster the bond will pay.

Length of the outstanding mortgages, or current face of the mortgages are a factor. “Seasoned pools”, as they are called, are mortgage pools that have had several years of payment on them. They have more predictable payments and duration. They will normally pay better because of that. Seasoned pools are usually what banks are looking for. They are generally interested in better cash flow and predictable cash flow.

The compensation or mark up potential is good in mortgage backed bonds. They are priced above treasuries because, although they are AAA rated, they are not absolute in their pay off and the payments fluctuate. Since they are usually 15-30 years in duration, they allow for price mark up. Where treasuries and straight agency debt allow for a few ticks to a .25, MBS’s can create spreads between buying and selling them up to a ½ or ¾ of point. This can translate to a $5,000 commission on a $1 million sale. Remember, a million dollars in one bond is not unusual for most institutions, and for banks over $500 million in assets, it’s normal.

CMO Bonds

Bank CD Yield

2007-10-08T06:15:00.000-07:00

Selling CD’s and taking advantage of loan demand

Banks and other institutions buy CD’s offered by other banks. If you have banks that buys CD’s, and you have a bank that needs money, you can earn from that. Lets say your investing bank is looking for a 3% 5 year CD (don’t be alarmed by the low rates, as of this printing, interest rates are at all time lows), The bank that is looking for money is offering a rate of 3.25%. You can approach the deposit bank with providing them a $100,000 deposit, not to exceed their total cost of 3.25%. You ask them if they pay for deposits, if they do, you tell the bank to issue the CD to your bank at 3%, and then you bill the deposit bank the .25 point spread between their cost and the CD rate you are giving to your customer. A .25 point for a 3 year CD is $750. What if you had 10 banks interested in 3 year CD’s? That’s $7500. Your client banks would wire the money in. Each deposit is fully insured, the bank sends them a receipt, and your done.

You also could do this with banks that are not as loaned out, but are looking to make a spread between their deposit rates, and a higher fixed income investment that you have. Let’s say there is a 4% corporate bond for 3 years that is available, and the deposit bank is paying 3.25% for 3 year deposit CD’s. If you can provide the bank with a CD at a total cost of 3.25%, and then take that money and invest it in a corporate bond, you made a spread for the bank, and you made money on both ends. The deposit spread, and the mark up on the corporate bond trade. These kinds of trades are simple to present and execute. The one objection you will encounter from some is the bank does not accept “Brokered Deposits”. Brokered Deposits are large time deposits that are listed as “brokered”, meaning, it was arranged through a broker. Some banks only consider deposits as brokered if they pay a fee for the deposit. Remember how we explained providing a jumbo CD to a bank and using their gross rate?, we provided the CD to a depositor and charged the bank a .25 point. Now, the bank never paid more for the deposit than if it issues it directly to our investor, we never exceeded their cost, but the bank is paying you a .25 point fee. For some reason, banks may not want to do that.

You can get around the bank paying the fee if your investor pays the fee. If a bank is offering 4% for 1 year, and the going rate on CD’s is 3.50%, you can offer the CD to your investor at 4%, bill THEM (investor) the .25 point and still net them 3.75% overall. Not all institutional investors pay fees, but they should if you are consistently showing them better rates than what they are seeing locally or directly.

Doing CD business is nice and easy, but you won’t make that much money. Bank deposits are only insured up to $100,000 per account, so your investor can only buy one $100,000 CD at any one bank. There are ways to capitalize on this market though if you do or have one of the following:

Have an institutional investor that only buys CD’s and has millions to put out at different banks

Represent a deposit bank exclusively, or at least be one of a few other brokers. You can then offer the rate to other brokerage firms and you get a cut on every deposit

Have a bank investor who also manages trust accounts. This way, your investing bank will call you with different customers of theirs that are looking for CD’s. They will give you the name of the customer and you just give the bank the wiring instructions and details to them. Trust departments may also buy other bonds; Municipals, treasuries, etc.

www.brokerjobs.com

Commercial Banks and Bond Yield

2007-10-08T06:11:00.000-07:00

Banks generally “beat to their own drum”. Unlike credit unions, which tend to be “clicky”, banks will do what is only best for them and each bank is different. If a commercial bank is open, it is investing continuously and has existing broker relationships. That is a certainty. Banks are in business for one thing - to earn more money. Generating greater returns on their loans and their investments is what they are in business for. Loan demand is your biggest objection. Banks feel obligated to push for greater loan demand from their customers. Mortgages, car loans and other loans generate income for long periods of time.

The available funds not used for loans are used for investments. Banks will keep a certain amount of money in Federal Funds or “Fed Funds”, as they are usually called. Fed funds is an overnight bank to bank lending rate. Banks with excess money can sell fed funds to their banks. Banks with low liquidity will borrow through it. Either way, it is a formidable competitor for bond brokers. The ease of fed funds allows for quick and easy, overnight rate of returns. However, the fact that fed funds is overnight, presents a problem too. Banks should not have an over abundance of money in overnight accounts, simply because it does not allow them a chance to “lock in” a fixed rate if interest rates decline. They will just “drift” downward as interest rates decline. Simply put, fed funds should be for reserves and convenience, but not a long term investment policy. If the bank is going to hedge themselves against interest rates rising (which brings bond prices down), then they need to move some money out of there.

Banks can buy almost any debt (bonds, notes CD’s). Most will not buy low grade corporate bonds, but pretty much everything else is open. What they each buy depends on a few things:

Asset size
Current investments
Loan demand
How educated they are

Asset size of a bank is important when determining whether you should contact them. Your best chance for success, if you are looking to work independently, or for a firm is Banks with assets between $100 million - $700 million. A bank with $100 million in assets may have $15 million in investments for instance. Portfolio sizes of $15 million to $100 million should be your target. You want to stay away from pursuing accounts much smaller than that, because the amount of time and work you put in trying to get them to work with you will not be worth the payout. Banks that are over 1 billion in assets are simply too big for most. Not for the reason you may think. They are not that much more

complicated, but they have in-house direct investment officers that do it themselves. You may get lucky where they call you back and buy something, but you will be working so “thin” (price/mark up), that it will be hard to make money. Bonds are based on “mark ups”, if a firm is offering the bond to you at $97 ($970 per $1000 bond), you can mark the bond up in price from their. ¼ of a point to a ½ a point is a normal mark up for most bonds. With the bigger banks, it will be hard to get that much into the bond. They are usually being called by a lot of brokers, and may be seeing the same thing. You don’t want to be showing a bond that is overly marked up in price. He may not want to talk to you anymore. So, the rule with the big banks ($1 billion+) is, work thin, don’t overwork, and just hope that he calls you back on occasion over the “other guy”.

Smaller to medium size banks are passed over by the large primary brokerage firms. So, not only, can you get in easier, it is more potentially rewarding. These banks can be educated, they won’t have a “team” of investment pros at the bank, so your suggestions and education presentations may pay off. It is also rewarding in that these smaller banks will put more “Stock” in personal relationships. You won’t get a lucky 2nd phone call trade, like you could get with a big bank buying everyday, but once they are opened, you can bring them into your philosophy and strategy. Personal relationships have a much better chance to grow, and your chances of always being undercut on price from other brokers, won’t happen as often. The smaller banks do not have the time to talk to 10 brokers every day. What you want, and this applies to any institution, is to be either their only broker (not likely in the beginning), or be one of three that he is dealing with. A sophisticated bank will spread the trades so that all of you get something.

How To Sell Bonds To Banks and Other Institutions

2007-10-08T06:08:00.000-07:00

Where is the money in the bond market or any fixed income area? Institutions. Institutions are the “life blood” of the bond market and the primary income source for bond brokers. Commercial Banks, Savings Banks, Credit Unions, Insurance Companies, and Municipalities (City, County, and other local government authorities). We will look deep inside this misunderstood area of investments. We will examine each type of institution, what they historically buy, who they buy from, which dealers to use, how to request and examine a portfolio, who to ask for and much more.

The benefits of dealing with institutions, especially banks and credit unions, is that you are not dealing with the personal money of the person you are talking to. Meaning, in most financial prospecting situations, you are usually working with an individual looking to invest HIS money. Institutions do not work that way of course. You are dealing with people who are hired to manage the portfolio for the benefit of the institution. This person will not have the paranoia that can set in with retail investors when brokers call them. The institutional manager will judge you in other ways for sure, but he will look at you based on service and need you can provide, plus he is not allowed to buy risky investments anyway.

Public institutions (banks, credit unions, municipal authorities) do not buy stock or other equities, The risk the principal itself in fixed income is minimal. There is price risk and market risk even with the safest investments though. Banks usually, or should have a pretty balanced portfolio. Treasury securities, agencies, mortgage backed securities, bank CD’s, and municipal bonds primarily. We will discuss this in detail when looking at banks specifically.

Credit Unions are also a major factor in the fixed income market. Credit unions need to be handled a little differently. Credit unions are “not for profit” institutions. They do not pay taxes. However, they do look to generate added income for the benefit of their members, which can translate into better services to their membership. Credit unions, especially the smaller ones (under 10 million in assets), are managed by people who have other functions or jobs outside the credit union. Credit unions will buy different fixed income product, but the smaller ones tend to stick with bank CD’s or they invest with their corporate credit union. As with banks, we will dedicate a section just for credit unions.

We will also learn how to market to Municipalities (cities, towns, authorities). These Governments are very limited in what they can invest in. They are obviously dealing with tax money and general revenues from their local area. Straight agencies, treasuries and some CD’s are usually about it. They are limited like I said, but if they buy $20 million dollars worth of an agency bond, that’s pretty good. Municipalities will have their own section later.

There are several areas we will need to get in to. Some are for education, some are for prospecting. All are necessary to maximize your production and to build a long lasting career. We will discuss the following areas and elements of the institutional fixed income market:

Banks
Trust departments
Credit unions
Municipalities
Insurance companies
Other institutions
Prospecting
Reading and analyzing portfolios
Types of fixed income product
Suitability
Competition
Relevant accounting laws
Lead sources
How you get paid
Top firms

You need to understand this market to succeed in it. The people you are going to speak with are professionals who will know if you can bring value to them or not. If you dedicate yourself to learning what you need to know, it is a very lucrative area of the market, where you client list can build steadily, and the money you are advising on can grow infinitely.

All banks own bonds of some sort, and they are buying them from brokers. Our primary bonds are:

• U.S. Treasury obligations (T-bills, T-notes, T-bonds)
• Government Agency Debt (GNMA)
• Private Agency Debt (FNMA, FHLMC, FHLB and others)
• Mortgage Backed Securities (Pass throughs , CMO’s, ARM’s)
• Municipal Bonds
• Investment Grade Corporate Bonds

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.

Selling Mortgage Backed Securities or CMO's

Mortgage backed securities offer the best alternative to decreased loan demand. Pass throughs, CMO’s and adjustable rate MBS’s are paid to the bank just like a loan that the banks has made for a mortgage. If a person takes out a $250,000 mortgage, the customer is paying back the bank monthly with principle and interest. As you know, if you own a home, your initial payments are mostly INTEREST in the early years. A mortgage backed security, if it is a new issue will operate the same way.

Length of the outstanding mortgages, or current face of the mortgages are a factor. “Seasoned pools”, as they are called, are mortgage pools that have had several years of payment on them. They have more predictable payments and duration. They will normally pay better because of that. Seasoned pools are usually what banks are looking for. They are generally interested in better cash flow and predictable cash flow.

The compensation or mark up potential is good in mortgage backed bonds. They are priced above treasuries because, although they are AAA rated, they are not absolute in their pay off and the payments fluctuate. Since they are usually 15-30 years in duration, they allow for price mark up. Where treasuries and straight agency debt allow for a few ticks to a .25, MBS’s can create spreads between buying and selling them up to a ½ or ¾ of point. This can translate to a $5,000 commission on a $1 million sale. Remember, a million dollars in one bond is not unusual for most institutions, and for banks over $500 million in assets, it’s normal.

Sell Bonds

Bond Price and Yield

2007-10-08T05:44:00.000-07:00

When interest rates rise, existing bond prices decline. This inverse price-yield relationship exists because bonds have a fixed nominal yield and the price is based on how attractive or not interest rates are compared to that fixed rate.

If interest rates increase, new bonds will come out at a higher rate - thus the existing bond is now les attractive and will trade at a lower price. If bond yields decrease, existing fixed income investment will increase as those will become more attractive.

Long term bond prices are more volatile than short term bond prices. The lower coupon securities of the same maturity will be more volatile as well.

It is best to invest in long term bonds when interest rates are high or peaked and are expected to drop. This will increase the price.

Investment Articles

Inverted Yield Curve - Bond Curve

2007-09-29T06:42:00.000-07:00

When the yield curve is inverted, short term interest rates are higher than long term rates. This normally occurs when interest rates have been targeted to rise based on tightenting by the federal reserve board.

When interest rates are higher on the short term or an inverted bond curve is in place, many investors will polace their money in money market investment securities.

Yield curves can also fluctuate or be flat - where interest rates are fairly equal across several maturities on the curve.

Treasury STRIP Yield - T Strip

2007-09-16T17:15:00.000-07:00

A treasury STRIP is a 0 coupon bond issued by the U.S Government and has a yield based on a discount price and the maturity.

Since T Strips are 0 coupon - they do not pay interest, so the overall rate of return is shown in it's yield to maturity. These securities are backed by the US Government and were created from Treasury Notes and Bonds. Strips are not considered new debt, but redeemed bonds re-issued as 0 coupon yield securities.

Maturities are normally long term (over 5 years) and the T Strip yield is figured using the deep discount price (below par), and the years to maturity. This will give the investment a realized overall rate of return or yield to maturity.

http://www.aitraining.com/treasurystrip.htm

Treasury Bond

2007-08-10T17:28:00.000-07:00

Yields on Treasury bonds fluctuate just like any other debt security. T Bonds are long term (10-30 years) and pay interest semi-annually.

Because US Treasury Bonds are AAA rated with higher credit quality than corporate bonds or other debt securities, their yields tend to be lower than others. However, they are very liquid and trade very close to the interest rate or yield markets.

http://www.aitraining.com/treasurybond.htm

Yield To Call - Callable Bonds

2007-08-04T16:32:00.000-07:00

Many bonds, including corporate and municipal securities are callable and will have a yield to call.

An issuer that puts a call feature on a bond is inserting that date as a way to refinance out early, if they choose to do so. The advantage to the issuer is that if interest rates decline, the municipality or corporation can redeem the higher interest rate bond and replace it with a lower bond rate. If this take place, the investor will realize a yield to call - instead of a yield to maturity.

Whether the YTC is better or worse for the investor will depend on when the redemption takes place and what price the bond is called at. The price is important, as it can be below, the same, or higher than the price the invetor paid. That will determine call yield.

If the bond is called at a higher price than what was paid, the YTC will be higher and vice versa.

The main risk with a bond that is called is it forces the investor to reinvest the money at a lower rate, as bond yields should be lower in the market at that time.

There could be other reasons for calling a bond early such as: rearranging maturities or just having the money to not have to offer the debt anymore. There is no reason to issue bonds if you don't need the money.

http://www.brokerjobs.com/bondyield.htm

Tax Free Yield

2007-08-02T16:20:00.000-07:00

One of the yields investors are seeking more and more are tax free yields offered by municipal bonds.

Muni bonds are federally exempt on the interest received. They are subject to state and local tax. The heavier the tax bracket - the better the yield will be.

If a bond was issued at par and had a coupon rate of 4% and the investor is in the 30% tax bracket, the tax free rate of return would be figured out by dividing 4 by 100 - the tax bracket of 30. This would come out to 5.71%

Municipal bonds offer a chance to earn interest without taxation. If you buy a bond issued in your home state, you could be triple tax free.

Rating, coupon rate, geographical area and bracket are the main factors of whether someone should buy a muni bond.

http://www.brokerjobs.com/munibonds.htm

Yield To Maturity Calculate

2007-07-31T10:02:00.000-07:00

Calculating yield to maturity under the "rule of thumb" method is not difficult. The concept with it is the YTM is based on the Nominal Yield, Price and the years to maturity. So, the formula or calculation is based on that.

Premium bonds have a lower yield to maturity vs. the nominal rate. That is because the nominal yield only pays to par value. Thus if the bond was bought above par, the premium amount does not earn interest and the premium is not paid at maturity. The investor is losing the above par amount at the end of the term. If the investment was sold beforehand at a profit - the cost would be a profit.

Example

A 5% bond was purchased at $1150 and the maturity is 15 years. Calculating YTM would be based on all of this information. The total premium amount is $150 - divided over 15 years would give you $10 per year. That is the amount that is basically lost each year on the price - if held to maturity.

The way the formula is calculated is you take the yearly real interest - which is $50 and then subtract the lost above par yearly price of $10. This leaves you with a real yearly return of $40. Then divide $40 by the average price of the bond during it's life. Since par ($1000) is the redemption price and $1150 was the price that was paid - the median price would be $1075.

So $40 divided by $1075 would be the YTM = 3.72%

Discount bonds are calculated the same way - except the yearly discount is added on to the nominal interest payments. This would result in a higher YTM calculation.

http://www.aitraining.com/ytm.htm

Current Yield

2007-07-31T05:11:00.000-07:00

A bond's current yield can be found by dividing the coupon or nominal by the current market price of the security. It is not an overly important yield to investors - as it is always changing and is most important if someone is pricing the bond to sell. If an investor is holding the security to maturity - then the current yield is not a big concern.

A debt that is priced above par (premium) will have a lower current yield vs. the nominal. A 7% corporate debenture priced at $102 will have a current of 6.86% ($70 divided by $1020). Discounted bonds will have a higher current yield than it's coupon rate.

http://www.aitraining.com/currentyield.htm

Nominal Yield

2007-07-31T04:57:00.000-07:00

The fixed interest rate on a bond is known as it's nominal yield or coupon rate. This is the rate that the issuer pays to investors. It is fixed, never changes and is paid to par value only.

Since the nominal yield is fixed, during times of lower current interest rates - bonds with high nominal rates will be priced at a premium. If a 7% bond is trading while interest rates are only 5%, bond brokers and traders will price the bond above par, which will give the security a lower yield to maturity.

High nominal coupons provide good current income, since that is the amount that is paid in internest to the bondholder. However that interest money is only paid to par value - so the nominal yield provides part of a bond's return.

When interest rates are lower, new offerings will come out at lower nominal rates. When yields are higher - new issues come out higher. It is in the secondary market that bonds will normally trade above or below par, based on the interest rate picture on similar bonds and the nominals that they are at.

http://www.aitraining.com/bondyield.htm

Yield Basics

2007-07-30T07:04:00.000-07:00

Bonds are priced to offer an effective yield to investors. Since fixed income securites are sold in par value amounts, the pricing of these bonds will effect the overall yield an investor gets.

Although you may receive a high coupon rate paid to par (nominal rate), if a premium was paid, your overall yield to maturity will be lower than the coupon rate. This is normal, as the coupon cannot be changed, but interest rates do change. The only think the market or a bond trader can do is re-price these bonds to current interest rate levels. That adjustment will be reflected in the current and yield to maturity.