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July 2009 - Posts
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What does taxpayers + investors equal? “Taken advantage of” How shameful! The greed of Wall Street exposes itself once again. What will it take to hold the Officers and Board Members accountable for their self-centered actions?
700 billion plus of taxpayer money well spent! This truly is a great reform put into action by our Government.
The word “Accountable” is just a word that the Government throws around on the outside of the four walls, but in the walls it’s just swept under the carpet and Americans never see any results.
You can call it “A slide of the hand or Out of sight out of mind”
http://www.msnbc.msn.com/id/32099693/ns/business-washington_post
Cheers,
Shawn Tierney
Financialjoe.com
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BOND BASICS
Bonds are an essential element to a diversified asset allocated portfolio, especially for the investor relying on income producing investments.
Government Bonds
Bills - debt securities maturing in less than one yearNotes - debt securities maturing in one to ten yearsBonds - debt securities maturing in more than ten years
Municipal Bonds
Municipal bonds are the next progression in terms of risk. Cities don't often go bankrupt. The major advantage to "munis" is that the returns are free from federal tax. Local governments sometimes make their debt non-taxable for residents, making some municipal bonds completely tax-free. Residents in certain states that do not have a state income tax have the luxury of buying bonds outside of their state of residence. Because of the tax savings, the yield is usually lower than that of a taxable bond. Depending on your personal situation, munis can be a great investment on an after-tax basis.
Corporate Bonds
A company can issue bonds just like it can issue stock. Large corporations have a lot of flexibility as to how much debt they can issue. The limit is whatever the market will bear. Generally, a short-term corporate bond is less than five years, an intermediate corporate bond is five to twelve years, and a long term is over twelve years.
Corporate bonds are characterized by higher yields because there is a higher risk of a company defaulting. They can also be the most rewarding fixed-income investments because of the risk the investor must take on. The company's credit quality is very important. The higher the quality, the lower the interest rate the investor receives.
Zero Coupon Bonds
This is a type of bond that makes no coupon payments but instead is issued at a considerable discount to par value. For example, a zero coupon bond with a $1000 par value and ten years to mature might be trading at $600. Meaning, today you would pay $600 for a bond that will be worth $1000 in ten years.
Agency Bonds and Mortgage-Backed Securities Agency Bonds are issued by the Federal Government and various government-sponsored organizations to raise money to help certain areas of the economy. Together, these securities are called agency bonds. These groups sell their own securities as one way to raise money. The U.S. Treasury does not issue any agency bonds.
Agency securities are considered very safe from default. Should they ever default, the government would probably use its credit to guarantee investors’ payments of interest and principal. This is generous protection, since the U.S. Government does not fully guarantee most agency securities.
Most agency bonds are in the form of mortgage-backed securities. These represent investments in a pool of mortgages.
Agency bonds provide yields that are higher than those of Treasury securities. This is because they lack explicit guarantees of safety. Their maturities range from one year to fifty years. Denominations vary from $1,000 to $50,000.
Some well-known agencies that issue securities are:
The U.S. Postal Service - raises funds to help its mail-delivery operations
The Federal Land Banks - raises funds for agricultural projects
The Government National Mortgage Association (Ginnie Mae) - finances housing projects
The Federal National Mortgage Association (Fannie Mae) - finances mortgages for the Federal Housing Administration and the Veterans Administration
The Federal Home Loan Mortgage Corporation (Freddie Mac) - finances federally chartered thrift institutions.
Ginnie Mae, Fannie Mae, and Freddie Mac issue the vast majority of mortgage-backed securities.
Series EE and Series HH bonds
Two types of non-marketable bonds are known as Series EE and series HH bonds. Series EE bonds are the savings bonds that have been popular for decades. They do not distribute interest periodically as many other bonds do. They are purchased at a discount from the face value (par). The discount is calculated using the bond's interest rate and years to maturity. Investors purchase them for less than their face value and let them build up to full face value at maturity.
The minimum face value of a Series EE bond is $50. The maximum face value possible is $30,000. One can purchase Series EE bonds at banks or through payroll deduction plans. The investor can allow the accrued interest to be taxed each year, or they can defer it until the bond is redeemed. The tax may be deferred beyond this date if the investor exchanges his or her bond for a Series HH bond.
Series HH bonds are savings bonds that do pay interest and are sold at their face values. Interest is paid twice per year. The denominations range from $500 to $10,000. Series HH bonds may be redeemed after six months. They normally mature in ten years but can be extended to twenty. Series HH bonds have fixed rates of interest and can only be obtained as exchanges of Series E or Series EE bonds.
Shawn Tierney
Financialjoe
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THE ONLY WAY TO BUY It cannot be expressed enough how important this next area of discussion is. It’s the difference between adding thousands of dollars to your return on yield, or giving up thousands of dollars on each bond you purchase.
Breaking down the bond purchase in the simplest manner
The most important piece of information for you to take from this is that your advisor has multiple options on how they can sell you a bond. Meaning, how they charge you for the purchase. This can make the difference between giving up thousands or keeping thousands.
Remember, your advisor is working for you and needs to be paid. If you only buy bonds from your advisor and they do not manage any other assets for you, you can’t negotiate with them on the commission price for the bonds. However, if your advisor manages other assets for you, there may be other options. For example:
You have $500,000 in a managed account with a blended fee of about 1.375% annual fee. This is generating a fee of $6,875 a year, at a payout of 35%, putting $2,406.25 in to your advisors pocket.
Say you have quarterly contact with the advisor just to review how you’re doing. Thirty minutes, four times a year, is 2 hours. That’s $1,203.12 an hour you’re paying him, so he should be able give you a break on the bond purchases. If not, get a new advisor. If they are willing to collect a commission of $720.00 which cost you thousands upfront, they should have your best interests at heart.
Below is a hypothetical example of what your advisor might be looking at when he is purchasing your bond. This can vary depending on the company they work for, but the behind the scenes options should be consistent.
Compare the two examples below:
-The first purchased the traditional way: Markup on the bond.
-The second purchased in the manner you should purchase: Commission ticket.
Compare the difference on the color-coded areas between the two options.
Municipal Bond: Arizona General Obligation Coupon: 5% Price: 108.225 Frequency it pays: Semi Annual Quantity: 185 Max Commission: 10.82
Sales Credit: ੦ $ / Bond ੦ $ / Ticket ੦ % Principal Yield-to-Call: 3.876 Price: 108.225 Amount: $200,271.75 Yield-to-Worst: 3.876 Sales Credit: 1.082 Sales credit: $2,001.70 Yield-to-Maturity: 3.988 Net Price:109.337 Net Amount Due: $202,273.45
Municipal Bond: Arizona General Obligation Coupon: 5% Price: 108.225 Frequency it pays: Semi Annual Quantity: 185 Max Commission: $75.00
Sales Credit: ੦ $ / Bond ੦ $ / Ticket ੦ % Principal Yield-to-Call: 3.995 Price: 108.225 Amount: $200,271.75 Yield-to-Worst: 3.995 Sales Credit: 0.40 Sales credit: $75.00 Yield-to-Maturity: 4.096 NetPrice:108.295 Net Amount Due: $200,346.75
Yield-to-Maturity: 3.988 or Yield-to-Maturity: 4.096 what Yield-To-Maturity would you want:
$185,000 @ Yield-to-Maturity: 3.988 for the 12 years you hold the bond equals $88,553.60 minus the markup of $2,001.70 gives you a total earnings of $86,531.90
VS.
$185,000 @ Yield-to-Maturity: 4.096 for the 12 years you hold the bond equals $90,931.20 minus the commission ticket of $75.00 gives you a total earnings of $90,856.20
That’s $4324.30 more in your pocket by simply paying a $75 commission, and that’s only on one bond purchase.
There is only one way to buy a bond and that’s without a markup. Buy your bonds with a commission ticket!
The markup is not required to be disclosed on your confirmation. This has been an advantage of the advisor because the investor does not contest a commission. The Municipal Securities Rulemaking Board (MSRB) does not require the markup disclosure, but there has been discussion to disclose markups on client confirmations in the future.
You would be better off paying the commisson ticket which you pay anyway, and keep the higher yield over the 12 year period.
Again, if your advisor manages your assets in a fee based manner, he should be buying your bonds at the minimum commission, which should be around $75.00.
Shawn Tierney
Financialjoe
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