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Bond Income Question

Old_JoeOld_Joe
edited February 2019 in Off-Topic
I'm looking at possibly purchasing individual municipal bonds, through the Schwab One-Source market. In looking at the listings, I see the coupon price, and also see the asking price. I'm not sure how to calculate the actual return, using those two factors.

For example, if I buy a bond with a coupon rate of 5%, with a maturity one year out, with a price of 105, what would the actual rate of return be for that bond?

Math was never my strong point, so thanks in advance for any help on this.

OJ

Comments

  • TedTed
    @Old_Joe: In your example, the coupon rate of 5% is equal to $50 dollars on a bond selling at par of $1,000. However, your example is selling at a premium of $1,050, so you return would be 0%.
    Regards,
    Ted
  • Old_JoeOld_Joe
    @Ted- OK, thanks much for the example and info.
  • johnNjohnN
    Usually schwab give u actual returns right before the order is placed
  • dstone42
    How frequently is the $50 paid?

    Schwab should show the rate of return to maturity.

    Call them and ask.
    (I had to go through this procedure with Fidelity and their fixed-income person was very helpful.)
    David
  • Old_JoeOld_Joe
    After Ted provided that info I took a closer look at the Schwab site- there is in fact a "YTM" column which gives the Yield To Maturity. Thanks to all for the help!

    BTW, doing Munis now doesn't seem to be advantageous, even compared to CD yield. Assuming a combined fed/state tax bite of 40% on a 2.7% CD leaves an after-tax income of about 1.6%, compared to a typical CA Muni tax-free 2-yr to maturity yield of about 1.5%.

    Why bother?
  • msf
    Since you asked the question, even when after tax yields are equivalent, the muni bond results in lower MAGI, however MAGI is calculated. (It's computed differently for Medicare IRMAA, for IRA deductiblility, etc.) That's because the pre-tax amount of interest for the muni bond is less.




  • guilhermes
    edited February 2019
    Myself, I try to keep in mind that the YTM can be affected by the risk of a Bond being called. In the Schwab site, some bonds include "Make Whole Call" for the case they are called. However, sometimes, the YTW (Yield to Worst) is left blank. I was expecting it to be equal to YTM. Can anyone make sense of this?
  • johnNjohnN
    edited February 2019
    dont know the answer... but here some basic info
    https://www.fool.com/knowledge-center/how-to-calculate-yield-to-worst.aspx

    maybe the bond still paying good but the bond desk does not know when bond could be called. potential call date may give you a potential YTW sceneario


    - I am very skeptical of buying private bonds from IL or Peuta Rico [dont know when they will be bankrup]....always do a google search of bond cusip so you know which firms/MF or ETFs holding the muni bonds - the more the firms hold show firms have done great research on bonds and they are looking to hold those bonds short/long term. Also set google.com/search to your gmail about the cusip or bonds so you will get quick email alerts if bond is doing bad and you can decide to sell very quickly [jump ship before whole thing sinks]

  • guilhermes
    Thank you johnN. It needs to be kept in mind the risks of calling and default - that when buying corporate bonds.
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