I suffered my first loss in the bond market on my 21st birthday. My godmother who previously had sent me a $25 US savings bond every year for my birthday, stopped.
It had been a pretty easy way to invest in bonds. One would show up each year in some Hallmark card that was not funny, and I’d put the bond in the same envelope at the bottom of my underwear drawer.
Then the card started showing up empty. I guess she thought I had reached maturity—which you need to know about to buy a bond.
I’m thinking about buying a bond because there is this new deposit of $6,000 in my IRA. I could let it just sit there like last year and make about $1.80. (You know that stuff compounds annually so in 2013 I would actually make a penny more. If you rounded up. Generously.) But I’m the kind of guy who likes to pretend he’s a 1%er and to earn BIG money while watching PBS documentaries.
My free bond finder at my online brokerage firm had 1,172 different bonds I could buy. Immediately ruling out Treasuries (U.S. is no longer triple A, baby, and Santorum might be president) and Munis (never buy a tax-advantaged investment in a tax-free account—that’s like telling the barista to leave room for cream in your coffee when you take it black), I clicked on Corporates. They had an “Agency” category, but that made me think of the CIA and Anthony Hopkins in “Silence of the Lambs”.
And there it was: God’s company (Warren Buffet, not Tebow), Berkshire Hathaway, with a bond with a 5.75% coupon rate. Unlike the $1.50 I just saved buying two sizes of freezer bags simultaneously, this coupon means Warren will pay you 5.75% every year. Guaranteed. Sort of. Not really.
Generally a bond comes like a $1,000 bill meaning it has a $1,000 printed, figuratively, on the “face” and each year you get two payments totaling, in this case because of the coupon rate, $57.50. Using my $6K IRA money, I’d be making $345. As opposed to last year’s $1.80.
Woohoo.
Now ask the brokerage firm to buy you one of these bonds and they will quote you a bid/ask of 120.464/122.113. No, they didn’t amazingly guess your IP address.
Er, ruh roh.
Because this bond is such a great deal in today’s interest rate environment, you have to pay $1,221.13 (recognize the number?) for a $1,000 bond.
My six grand buys four bonds now; which would pay $230 a year in interest. Still beats that $1.80.
No, it’s not that simple. That whole maturity thing. This particular long-term bond matures on 1/15/2040, meaning that’s when Warren pays back the $1,000. Yes, the $1,000 for which you paid $1,221.13. So, four $1,000 bonds plus 28 years of interest payments minus the excess you paid to buy the bond in the first place…do the math.
See, this is why people buy bond funds.
Comments