# Investing in Bonds



## 50invester (Feb 10, 2010)

Hello: Just following up on another thread (forgot which one) where I asked some questions on purchasing individual bonds. I have read alot of confusing info on buying individual bonds. I have taken a look at some of the individual bonds for sale on 'Canadian Fixed Income', obviously a broker that deals in individual bonds. I also have accounts with Questrade where they are now promoting bond sales with 'Zero' commissions. From what I gather, the 'Zero' commission claim is more or less a scam. Maybe thats too harsh a word, but these brokers make there money by marking up the sell price to you from what the bond it actually trading for at the time. Is this correct? The question is how do you find out what the real price is so that you know what the purcahse is actually costing you. Another question (maybe a dumb one), is if you buy a bond and hold it all the way to maturity, do you not get back what you paid for it ... in other words, does it really matter what you paid? I guess this affects the yield .. maybe I answered my own question? 

Generally, I get the feeling that the bond market is for the high rollers. Maybe the bond funds are for the little guys like me? The issue I have with bond funds is that I don't want to risk my principal ... I just want to get a decent return over time. 

On the 'Canadian Fixed Income' site, they seem to have alot of good corporate bonds for sale, as an example:

Bell Canada 2031Dec30 109.16 6.82 (Yield)

Now, unless I just dont get it, this seems like a no-brainer. I guess my question to all is why anyone would not buy this? What are the risks? Too long of a maturity? Type of bond? Yield too low? Price? ... and what to I get when I buy it ... a certificate? 

How about a strip bond. Why buy this type over a regular bond? 

Finally, I am guessing that as interest rates rise over the next little while, bond prices will drop and yields will go up, so probably not a good time to buy that Bell Canada bond, right? 

Any comments would be appreciated.


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## andrewf (Mar 1, 2010)

> maybe I answered my own question?


Sounds like it.

That Bell bond is a very long maturity. If/when long term yields rise, that bond is going to lose a lot of value. If you hold it to maturity, this doesn't matter much (if you're happy with that yield). If you might need to sell it, it might be a concern. If you want my opinion, I wouldn't buy it.

To me, it doesn't make a lot of sense to build your own bond portfolio unless it's a decent size. I'd say at least a $100k in bonds, if not more. Less than that, use a corporate bond ETF like CBO. It's hard to get diversification with small portfolios.

If you are interested in running your own bond portfolio, I'd suggest going to the library and borrowing Hank Cunningham's book on the subject: 

In Your Best Interest: The Ultimate Guide to the Canadian Bond Market


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## tendim (Nov 18, 2010)

50invester said:


> Maybe the bond funds are for the little guys like me? The issue I have with bond funds is that I don't want to risk my principal ... I just want to get a decent return over time.


You've pretty much nailed it: With a bond _fund_ your principal is not guaranteed, whereas with a bond it is guaranteed insofar as the debt rating of the issuer is guaranteed. So if you buy a bond with a $1000 face value and hold it to maturity, you will get that $1000 back. However, with a fund, if you buy $1000 worth of bond funds, there is no guarantee that you'll get back that $1000: the bond fund price goes with the market, and there is no "maturity date" for a bond fund.

Most people see no value in holding bonds, but they also don't look at it with holding it to maturity. As andrewf said, if you are happy with the yield to maturity, then you'll have a solid investment. However if you buy a bond without intending to hold it to maturity, you are victim to the current interest rates and how they impact the overall value of the bond.


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## Belguy (May 24, 2010)

I thought that this article from Rob Carrick of the Globe and Mail might be of interest to some:

http://www.theglobeandmail.com/glob...to-hedge-against-rising-rates/article1904387/

Any thoughts or comments for those of us who are having a difficult time trying to figure out what investments to put in our fixed income allocation?


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## Eclectic12 (Oct 20, 2010)

50invester said:


> On the 'Canadian Fixed Income' site, they seem to have alot of good corporate bonds for sale, as an example:
> 
> Bell Canada 2031Dec30 109.16 6.82 (Yield)
> 
> ...


Re: Zero commission claim is more or less a scam. 

Could be ... particularly if there's a markup to the small investor. I've got a long time horizon and have better options so I have not spent a lot of time on it.


Re: if you hold the bond to maturity, does it matter what you paid?

Yes ... any extra paid will reduce the yield. Then too, the markup is likely higher than the large players get so it's probably possible to end up with slim or no yield.


Re: bond fund are better for smaller investors

In the current environment, I think so ... but I haven't run the numbers.


Re: why not buy the 30 year Bell bond with a 6.82 yield?

You've covered what happens if interest rates go up. Then too, there are equities that offer 4 to 8 % dividends plus possible capital gains.


Re: What do I get when I buy?

I expect it is the same as shares where you get a bookkeeping entry. At maturity, the bookkeeping entry will be deleted and the principal will be paid (similar to when a share trade is settled - the shares disappear and the proceeds appear). Note that the interest will have been credited on the due dates, through the life of the bond.


Re: How about a strip bond. Why buy this type over a regular bond? 

Finally something I know for sure ... *grin*. You may know this but a strip bond has the interest coupons removed. So at maturity, the face value is all you get. 

As for why buy it, a regular bond will produce interest payments that may or may not be easy to re-invest at a similar rate. A strip bond has one payout at maturity - so the return is constant/predictable. Which you'd want if you were planning say - withdrawals from an RRSP or to pay for a child's education.

Here is a couple of links that go into more detail:
http://www.fiscalagents.com/newsletter/4stripbd.shtml
http://www.theglobeandmail.com/glob...nds-and-real-return-bonds-work/article731566/


Cheers


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## Belguy (May 24, 2010)

Can anyone explain the relatively high volatility of the iShares Real Return Bond Fund (XRB) of late?

Might this be indicative of similar volatility going forward?


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## andrewf (Mar 1, 2010)

XRB has a very long duration. Long durations mean higher sensitivity to changes in interest rate. When those people on BNN are advocating RRBs as an inflation hedge they seem to forget to mention the volatility. These are not suitable for low-risk, short term investments.


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## HaroldCrump (Jun 10, 2009)

Belguy said:


> Can anyone explain the relatively high volatility of the iShares Real Return Bond Fund (XRB) of late?


I'd speculate that it is because of rising inflation fears.
The 10 year bond yeilds have crept up because of the same reason.
And the 5 year fixed mortgage rates are being raised by the banks, too.

Up until sometime ago, it appeared that the bond market is factoring in a flat inflationary or even deflationary environment, as evidenced by the low yields on long term bonds.
However, now that situation is correcting itself and the market is finally catching up to the fact that inflation is increasing, possibly at an increasing rate.
As usual, the market is a trailing indicator.


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## Belguy (May 24, 2010)

From the Globe and Mail link, provided above:

"Another new ETF product that deserves attention at a time of rising interest rates is the series of target maturity bond ETF's just introduced by BMO. These funds are designed to address the criticism that bond ETF's never mature, like actual bonds do. This is a real concern at a time of rising rates because bonds that fall in price will ultimately mature and repay the amount invested in them. With bond ETF's and bond mutual funds, you have to wait for the next period of falling interest rates to see a rebound in price."

"BMO's target maturity funds are basically corporate bond ETF's that have a maturity date. The maturity dates currently available are year-end 2013, 2015, 2020, or 2025".

"Each target maturity ETF holds a mix of BMO's individual bond ETF's. As target maturity ETF's get close to their end date, the mix becomes more conservative and ultimately resembles a money market fund. The goal is to return your invested capital to you intact."

"The management fee for these ETF's is 0.30 per cent, which is a drag on returns. But it can be offset by the fact that BMO pays a lot less for bonds than you do. These ETF's are vastly cheaper than someone trying to buy individual bonds themselves by trying to create their own bond ladder because bond desks typically burn them."

"Two additional similarities between target maturity ETF's and actual bonds is, first, they both fluctuate in price as interest rates move up and down and, second, that the market price when you buy can be a little higher or lower than the amount you'll get at maturity. Also, target ETF's pay interest as do regular bonds."

My question then, is this: How do you purchasers of individual bonds feel about these new target maturity bond funds from BMO. Do they address some of your concerns about bond funds?


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## Greyhound86 (Feb 21, 2010)

Belguy said:


> From the Globe and Mail link, provided above:
> 
> "Another new ETF product that deserves attention at a time of rising interest rates is the series of target maturity bond ETF's just introduced by BMO.
> 
> My question then, is this: How do you purchasers of individual bonds feel about these new target maturity bond funds from BMO. Do they address some of your concerns about bond funds?


I had a quick look at their site. for the 2013 ETF, Current Yield 4.6%, Yield to Maturity 2.91%

I guess this implies that the value at maturity is going to be less than your cost. 

There is a fixed maturity date (which is good in my opinion) but there is not a fixed maturity price. But you could take a pretty good guess based on the YTM and Current Yield. ( i have a cold and am too lazy to calc it now)

With individual bonds you know that if you pay $102 for a $100 bond you are going to get $100 back when it matures. 

These ETF's seem like a good idea. The lack of a fixed maturity value may be a weakness though. Less risky than a regular bond ETF but still not quite the same as a bond or GIC ladder. 

There is an article about these ETF's on the Canadian Couch Potato site (make sure you read the comments)


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## andrewf (Mar 1, 2010)

I wasn't aware that there were target maturity funds in Canada yet. Unfortunately the space is not yet fully fleshed out, with maturities each year for the next 5 to 7 years. It's a little disappointing that it's basically repackaging their other bond funds. Hopefully once they get some AUM they'll move toward holding bonds directly. I couldn't find it in the prospectus, but do they intend to retire these funds as they mature and distribute the fund's NAV or do they intend to morph them into MMFs? The funds in the US intend the former.

Overall, I think this is a pretty good way allaying the concerns of some that bond funds don't mature (a concern which I thought was overdone). The fees ought to come down a bit too, but overall, this seems like a great tool for allowing people to quickly and easily build bond ladders that are diversified and liquid. Conventional bond ladders require you to take a hit on the bid/ask spread should you need to liquidate prior to maturity.

All that said, I think CBO still has these funds beat in terms of a laddered bond ETF, but good effort and I wish BMO well in fleshing out these funds.


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## Greyhound86 (Feb 21, 2010)

I believe BMO intends to sell the bonds in the fund (actually a bond ETF) and invest the proceeds in a money market investment as the ETF gets closer to maturity.


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## I'm Howard (Oct 13, 2010)

I have sold all my Bonds and Bond ETF's, rates are heading up so for the next year a one year GIC will do the trick.

I continue to hold JNK, this fund pays over 7%, albeit in the Greenback, and shoud be less susceptible to rate increases.

The historic norm for rates is 8%, we will see those days again, this could cause bonds to drop, possibly 50%.


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## Belguy (May 24, 2010)

My current core bond holding is the PH&N Bond Fund D.

My question now is should I just continue to hold that fund or should I switch to the PH&N Short Term Bond Fund?

What would you do?

https://www.phn.com/Default.aspx?tabid=524

https://www.phn.com/Default.aspx?tabid=520

Or, if an investor was willing to take on additional risk, would you first consider a high yield bond fund?

Also, should a long term investor hang on to his or her Real Return Bond allocation in spite of their recent declines?


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## olivaw (Nov 21, 2010)

50invester said:


> Bell Canada 2031Dec30 109.16 6.82 (Yield)
> 
> Now, unless I just dont get it, this seems like a no-brainer. I guess my question to all is why anyone would not buy this? What are the risks? Too long of a maturity? Type of bond? Yield too low? Price? ... and what to I get when I buy it ... a certificate?


Am I correct in understanding this to be a 20 year bond? 

Some concerns with individual bonds: 
- Risk of default. 
- The bond will still decline in value if interest rates go up. You just won't notice it unless you try to sell it. 

I've always worked under the assumption that it is a wash - i.e. bond funds will eventually work themselves out if you hold them long enough. If you holding period is forever, you'll still collect the dividend. Funds also offer the advantage of diversification. 

My own preference right now is for short term ETFs like XSB and CBO. My understanding is that the value won't decline as much as longer term bonds or bond funds and they'll recover quicker.


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## Financial Cents (Jul 22, 2010)

I agree with the last comment. 

Long-term, bonds become a wash, if you're holding period is at least 20 years, you'll a) collect the dividend, b) get a chance to reinvest the dividend and c) level out short-term and long-term bond market fluctuations.

Personally, I use XBB as my "all in one product". I've got 20+ years to retire so I don't see much point in having tons of money in XSB or CBO. Talk to me in another 10 years however, and I'll probably start holding either one of these.

I need to get my ol' man into XSB, CBO or CLF this year. He's 60+ and currently in a mutual fund charging him over 1%.


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## warp (Sep 4, 2010)

I'm Howard said:


> I have sold all my Bonds and Bond ETF's, rates are heading up so for the next year a one year GIC will do the trick.
> 
> I continue to hold JNK, this fund pays over 7%, albeit in the Greenback, and shoud be less susceptible to rate increases.
> 
> The historic norm for rates is 8%, we will see those days again, this could cause bonds to drop, possibly 50%.


HOWARD:

Where did you buy the 1 year GIC and what rate did you get on it?

I have basically put part of my cash into ALLY and looking at opening an account at Peoples Trust, where I have family cash sittng ( to take full use of CIDC maximums).....we have to be content with 2% waiting for buying 
opportunities.

By the way,,,I bought JNK amost a year ago, yeilding closer to 10%, ( and a small cap gain too). I have noticed that the monthly interest payments are getting smaller...but in jan we all got a nice cap gain div too!

Like TGAL says .....sometimes its just lucky timing.
The historical spread on JNK is about 5.5-6 %.....

Where else can we put money to work in CANADA??????


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## funinagg (Jun 10, 2010)

in the same boat as many of you. have phn110 and btg771. hopefully 15+ years to retirement  maybe 20+. i am assuming that i would get atleast get back what I paid for plus distributions over this long run. but as discussed elsewhere one may still make more money by selling these now and buying back a year or two later. investor versus trader i guess.


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## I'm Howard (Oct 13, 2010)

One Year GIC at RBC .


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## warp (Sep 4, 2010)

Mind telling us what rate you got on that i year GIC at RBC?

Unless you expect rates to fall...why not just put it in a HISA , at 2% and have the money avaliable anytime you want it?


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