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Buying individual bonds - not bond mutual funds

I've never done it, but I've started to look at a purchase of corporate bond offerings through by Schwab account. Some are so much better than CD rates.

Examples:
Valero Energy Corporation offers a coupon rate of 6.15% with a maturity date of 2/1/2020. I see a Goldman Sachs offering with coupon rate 6% with maturity date of 6/15/2020.

If I were to purchase shares of either of these bond offerings, is it as simple as I will make ~6% on my investment per year? I understand the risk for default, but these are 2 good stable companies where I might be willing to take risk. Isn't the return on buying these bonds so much better than a CD? Or am I missing something? What should I be looking at?

Comments

  • edited November 2018
    https://www.macroaxis.com/invest/ratio/VLO--Probability-Of-Bankruptcy

    Valero maybe a more difficult one to buy out there

    https://seekingalpha.com/article/4155058-valero-almost-broke-1b-threshold-rins-2017


    Maybe safer to buy att or Verizon lesser yield but sleep better at night

    Do ur diligence research before but it and I would buy themininum

    I do have Goldman bond since 09 one of best vehicles I held since

    Call schwab bond desk and ask if there are - REF Flags-on these bonds before buying them
  • Pay careful attention to the price you pay and the commission you pay. Just making up numbers here, but it might be the case that you pay $1050 for a bond which will pay you $1000 on 2/1/2020 (so you have a capital loss of $50).

    Even though the coupon rate is 6.15%, you won't make 6.15% after figuring in everything.

    But you'll surely clear more than money market rate and perhaps do better than a CD. Run the numbers.

    For such a short term, repayment risk should be pretty low.

    I did this in my IRA and asked the Fidelity Fixed Income folks for help in understanding the process and details.

    David
  • msf
    edited November 2018
    MikeM said:


    Valero Energy Corporation offers a coupon rate of 6.15% with a maturity date of 2/1/2020. I see a Goldman Sachs offering with coupon rate 6% with maturity date of 6/15/2020.

    If I were to purchase shares of either of these bond offerings, is it as simple as I will make ~6% on my investment per year? I understand the risk for default, but these are 2 good stable companies where I might be willing to take risk. Isn't the return on buying these bonds so much better than a CD? Or am I missing something? What should I be looking at?

    Is the Valero bond CUSIP 91913YAR1?

    What I see on Fidelity's site right now (overnight) is a yield to worst/yield to maturity of 3.375%. That's because one pays a premium for the bond. So some of the coupon payment is effectively return of principal, not interest. It's rated BAA2, just barely investment grade (the lowest IG rating being BAA3).

    Schwab (again overnight, not available for trading now) shows YTW of 3.233%.

    To put this in perspective, 1 year Treasuries are yielding about 2¾. Two year Treasuries are yielding just south of 3%. (And in a taxable account, they have the advantage over corporates of being state tax exempt.)
    https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

    Even if the coupon payments did amount to 6% of your principal, you wouldn't be able to maintain that rate of return. You'd have to reinvest the interest and where are you going to reinvest at 6% every six month?
  • dstone42 said:

    it might be the case that you pay $1050 for a bond which will pay you $1000 on 2/1/2020 (so you have a capital loss of $50).

    No capital loss, but a diminution of interest as I described above.

    In your example, that $50 would offset the interest paid (in a hellish calculation that you hope your broker is doing correctly for you). In a taxable account, rather than declaring the full amount of the coupon as interest and then declaring a cap loss when the bond matures, you declare less interest all along the way.

    That's even better from a tax perspective, since your using the $50 loss to offset ordinary income.

  • edited November 2018
    Hi sir
    Look at drug company MNK bonds around 80 cents much better yield.... Company is doing fair finance and won't be bankrupt matures 2023... I bought a few 2 wks ago
    https://www.macroaxis.com/invest/bond/MNK/561234AD7
  • edited November 2018
    I use to own bonds but after many got called away before maturity I was faced with buying another bond to replace it so I moved into bond funds. There are many bond deals done that the average retail investor does not have access to that big money does. Now, I leave all this up to the fund managers to handle. If I feel they are doing a respectful job then I'll keep their fund and if not then I'll play the Trump gig and fire them and replace them with another.
  • @MFO Members: Interested in owning a bond fund or some individual bond ? Here's a bond primer from U.S. News & World Report.
    Rgards,
    Ted
    The Ultimate Guide To Bonds:
    https://money.usnews.com/investing/investing-101/articles/the-ultimate-guide-to-bonds
  • One should expect premium bonds to get called. If a bond is trading above face value, that means that the interest payments (coupons) are above market rate (based on face value). So the issuer would prefer to pay off that bond and reissue it with a lower (market rate) coupon.

    That's why when one buys bonds, one should look at yield to worst, and think of these bonds as having shorter maturity. (The market prices them this way as well.)

    A big reason why a corporation doesn't call premium bonds when the call date comes is that they can't - their credit rating may be shot or for some other reason they can't take on new, cheaper debt to pay off the old bond. If that's the case, you just have to hope that the corp remains in good enough condition to continue making timely interest payments.

    Which brings us to JohnN's MNK bond:
    https://www.macroaxis.com/invest/bond/MNK/561234AE5

    Macroaxis rates this bond as "Dangerous". Moody's rates it B2 (2nd lowest single B rating), S&P rates it B- (lowest single B rating). Does that mean the company is about to go bankrupt? Hardly - the rating has more to do with the likelihood of default, which can happen well before bankruptcy. Does it mean that the bond is about to default? That's not so clear.

    D rated bonds are in default. S&P considers CC rated bonds to be certain to default; the question is when, not if. Single B bonds are not expected to default so long as the company's luck holds out:
    An obligation rated 'B' is more vulnerable to nonpayment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitments on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitments on the obligation.
    https://www.standardandpoors.com/en_US/web/guest/article/-/view/sourceId/504352

    Historically, about 1/5 of single B rated bonds default over a period of five years (about the time it will take for this bond to mature). See Table 25 on p. 62 here:
    https://www.spratings.com/documents/20184/774196/2016+Annual+Global+Corporate+Default+Study+And+Rating+Transitions.pdf/2ddcf9dd-3b82-4151-9dab-8e3fc70a7035

    Recently, default rates have been below average (strong economy). But Moody's expects an increase in risk for junk bonds:
    https://www.cnbc.com/2018/05/25/moodys-warns-of-particularly-large-wave-of-junk-bond-defaults.html

    Even if a bond defaults, one is unlikely to lose 100% of the investment. A default could be as minor as being a day late and a dollar short. Or it could be as major as the issuer halting payments to work out some deal with its creditors. In any case, creditors usually get some percentage of their money back.

    Odds are this bond will work out fine - 80% of the time there isn't even a minor glitch in payments for B bonds over five years. It's just not the type of bond I might suggest as an alternative to a CD.
  • Thanks everyone for the responses. What I glean from these replies is that I have a lot to learn before blindly buying. I'll read the links posted here and use Schwab's site to learn more. Thanks again.
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