# Buying individual bonds



## gibor365 (Apr 1, 2011)

Many "analyst" on BNN are telling that buying individual bond now is better than buy Bond ETF. I need to increase my bond exposure, currently I'm holding just CBO nad recently reduced TDB909. Was wondering if anyone bought any individual bonds recently? When you are buying at which number you are looking at? As an example I check corporate bonds available in my discount brokarage, one that looks interesting is 

Issuer: 
FAIRFAX FINANCIAL
Coupon: 
7.25% 
At Maturity: Jun 22, 2020 
Credit Rating: BBB 
Payment Frequency: Semi-Annual 
Yield: 4.511% Semi-Annual, 4.562% Annual 
Face Value: $5,000.00
Price (Per 100):$116.8727 
Accrued Interest: $71.51 
Estimated Cost: $5,915.15
Settlement Date: Mar 04, 2013 

What are cons/pros for buying such bond?


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## james4beach (Nov 15, 2012)

I do this a lot. Some comments:

1. I would only do this in a tax sheltered account for many reasons, including some tax awkwardness (e.g. accrued interest paid)

2. If you're buying corporates like the one you mentioned, you'll have to buy many corporates to get any kind of diversification. Remember these guys can default and wipe out the value of the bond. I think you'll need 20+ bonds from different issuers to get some kind of diversification. If you're buying individual corporates, this should be in a big account because you'll need lots of bonds.

3. Buying individual government bonds makes good sense, and you don't have the diversification worry. This is what I do.


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## gibor365 (Apr 1, 2011)

james, I'm talking only about RRSP, I don't need 20+ bonds, maximum 3-5 bonds. 
I checked government bonds 5-10 years . The highest yield has:
Issuer: CANADA HOUSING TRUST
Coupon: 2.4% 
At Maturity: Dec 15, 2022 
Credit Rating: AAA 
Payment Frequency: Semi-Annual 
Yield: 2.312% Semi-Annual, 2.325% Annual 
Face Value: $5,000.00
Price (Per 100): $100.7613 
Accrued Interest: $25.97 
Estimated Cost: $5,064.04

But with yield 2.3% I can get 4 years GIC . So, I don't understand point of buying gov bonds? Can you please clarify?
btw, what is it Accrued Interest: $25.97 ?

Similar story for bonds longer than 10 y
Issuer: CANADA
Coupon: 5.0% 
At Maturity: Jun 01, 2037 
Yield: 2.532% Semi-Annual, 2.548% Annual 
Face Value: $5,000.00
Price (Per 100): $144.5013 
Accrued Interest: $63.70 
Estimated Cost: $7,288.77

and short term (less than 5 y) yields up to 1.5%.


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## gibor365 (Apr 1, 2011)

Can anyone recommend good book/link kinda "trading bonds for dummies" or so ?!


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## webber22 (Mar 6, 2011)

There is a growing trend now for bonds to be called in. In the Fairfax example above, the bond is callable, you could lose 16% if they called it at par. Normally they call it at slightly above par or market prices, but there is no guarantee.
I took a small loss recently on a Brookfield Asset bond that was called in. Since then I've sold off all my bonds acquired over the years at a large profit in the rsp account


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## james4beach (Nov 15, 2012)

The Government bond is just for diversification. The GIC rates today are pretty good too, in comparison.

Government bonds are treated as golden collateral by banks and brokerages. In my brokerage, the Gov bonds I have are treated like 90% cash. And they're very liquid, unlike GICs. So if I have a 10 year government bond that pays a guaranteed rate until maturity, I have no risk or default or loss until maturity, great liquidity, and high collateral value.


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## HaroldCrump (Jun 10, 2009)

Good point by webber22 - you have to watch for the callable provision.
Like james4beach, I like to buy individual bonds, but I haven't bought any in the last couple of years or so.
I agree with pretty much all the points J4B listed above, including diversifying among several corporate bonds.

Also, I wouldn't go below BBB.
Corporate bonds have a huge demand these days, which has pushed down the yields, esp. for those at or just below investment grade.
It appears that corporate bonds might be over-bought.

I would also not go out to 2020 and beyond.
The max. I'd be willing to go is 5 years from now, and even that's a stretch.
Don't chase yield.
You are not a pension plan or insurance company that needs 30 years bonds.
Keep your durations short (< 5), stay at or around investment grade, and check all the provisions.

In other words, don't get greedy.

Finally, make sure you read the prospectus for the bond issue carefully to understand where this particular bond sits on the capital structure.
Is it secure or unsecured, is it senior or junior, what are the call conditions etc.

It is also not a bad idea to study the financial statements of the company that you are buying the bonds in.
I always do this, as if I am buying stock in this company.
I know that bonds have a higher claim than both equity and pref. shares but it doesn't hurt to analyze the financial statements.

There is only one individual bond that I ever made a mistake on - a YLO bond scheduled to mature in 2015.
The bond was BBB+ when I had bought 5 years ago, but YLO went downhill hard and fast during 2011.
The company went through a debt re-structuring and frankly I was totally delighted when the bond was re-structured and not written off completely.
YLO was essentially bankrupt and I was fully expecting the bond to return only about 20c. at best.

Fortunately, it was a very small % of my holdings and would not have made a huge difference even if it had defaulted entirely.

Hench, the importance of diversifying among companies when you buy bonds.


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## scomac (Aug 22, 2009)

gibor said:


> Can anyone recommend good book/link kinda "trading bonds for dummies" or so ?!


Get the latest edition of Hank Cunningham's In Your Best Interest: The Ultimate Guide to the Canadian Bond Market. I've got the original 2006 edition; everything you need to know is covered.


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## gibor365 (Apr 1, 2011)

HaroldCrump said:


> Hench, the importance of diversifying among companies when you buy bonds.


Than again, we're coming to ETF, like CBO , laddered structure , short-term corporate....OK, MER, but I buy only once... why not to go with it?


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## HaroldCrump (Jun 10, 2009)

gibor said:


> Than again, we're coming to ETF, like CBO , laddered structure , short-term corporate....OK, MER, but I buy only once... why not to go with it?


You could, it depends on how much work you are willing to do on your own and how much risk you are willing to take.
Just like buying a stock ETF vs. picking your own stocks.

In the case of CBO, it is all investment grade bonds.
And the yield is too low for my liking...currently 1.89%.
Take the 0.28% MER out, and you are left with nothing.

Might as well buy a GIC, or even an ING HISA account.


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## P_I (Dec 2, 2011)

I'd second scomac's book recommendation. By far the best Canadian book on the subject.


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## Eder (Feb 16, 2011)

Dont forget you need to pay the juice to purchase a bond....expect ~2% to buy it if only a 5k bond . Effectively you lose money the 1st year you buy a 4% yield if you include inflation. Then you get to pay more juice when you sell. That's why I like to buy at least a 25k bond and do it over the phone with your broker to try get the best deal and selection.
I have pretty much sold my corporates and stuffed the proceeds into HISA's where I can lose money just as fast to inflation lol.


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## james4beach (Nov 15, 2012)

I agree that there is no point to most corporate bond funds; after MER you're better off in a GIC at current rates.


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## andrewf (Mar 1, 2010)

I think there is some merit to XFR as an alternative to a HISA when you're going beyond the $100k CDIC limit.


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## lonewolf (Jun 12, 2012)

I agree with "in your best interest" by Hank being a very good book.

There is a 30 year cycle in interest rates which is in roughly the time zone to bottom around this time frame give or take a year or 2. Which will lead to 30yrs of rising interest rates I think a 5yr ladder will out perform a 10yr ladder. Do not know about the newer version of the book in the older book Cunningham seamed to favour a 10 year ladder.

I like the GICs from the Manitoba virtual credit unions over bonds.


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## gibor365 (Apr 1, 2011)

Eder said:


> Dont forget you need to pay the juice to purchase a bond....expect ~2% to buy it if only a 5k bond .


 What do you mean? Isn't it like stock $6.95 trade fee?


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## james4beach (Nov 15, 2012)

I think the bond fees are higher, for example $20 minimum at iTrade. Still though, from what I've calculated, buying bonds individually is far cheaper than owning a bond ETF.

The trick is to buy and hold to maturity, so you only make one trade. Your total hit from the fee will only be approx 5 to 10 basis points of yield... think of it like a 0.10% MER. On a large portfolio of bonds it could be as low as 0.05% MER. That's an enormous savings versus the bond ETFs.


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## gibor365 (Apr 1, 2011)

I need to park Cash within RRSP and I don't have too many options except ATL5000 or TDB8150 (1.25%). I know that some institutions pay higher interest , but I don't want to spread out RRSPs between many institutions... I don't have problem with Cash portion as I get on it 2% in ING.
Interestingly to know which bond ETF (exclude junk bonds) withing about 20 available has the best YTM after MER?

P.S. I put hold on recommended book in the library


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## andrewf (Mar 1, 2010)

What about XFR or HFR?


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## P_I (Dec 2, 2011)

gibor said:


> What do you mean? Isn't it like stock $6.95 trade fee?


Bond commissions are built into the quoted bid/ask prices, rather than being a separately quoted commission fee. To see the impact, check out how the ask price (and therefore yield to maturity) changes as you change the quantity. Try 5K, then 10K, then 25K to see the effect on quoted price. 

From Buying Individual Bonds - finiki, the Canadian financial Wiki,


> Generally you will find the ask prices to be quite close to the published prices of the GoC benchmark bonds, especially for anything at or above $20K. The price breaks at TD Waterhouse for example are at 10K, 20K, 30K, 50K, 75K, 100K, 250K. The biggest break is at $10K and the next biggest at $20K. The $5K rates aren't that great, so best to stick with $10K and above.


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## Eder (Feb 16, 2011)

The juice becomes higher the more illiquid the bond. Often corporates cost as high as 2% to buy.


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## james4beach (Nov 15, 2012)

Right, worse fees and spreads on illiquid bonds. I don't ever bother with these...

Try using the pfin web site to look up the wholesale prices for your bond. Then you can compare its market yield versus your after-fees yield, to see how much you're paying in fees.

iTrade is also nice in that the fees are separated from the bond price quote, which makes fees more transparent.


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## gibor365 (Apr 1, 2011)

andrewf said:


> What about XFR or HFR?


XFR YTM 1.3% , substract MER -> ATL5000 or TDB8150 will be better 
HFR cannot find YTM at all, but Weighted Average Current Yield: 0.60% is it the same like YTM?


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## andrewf (Mar 1, 2010)

XFR is decent for parking cash if you're concerned about CDIC limits. It mostly holds government of Canada bonds.

XFR you get 1.1% after MER. HFR doesn't track an index which makes YTM a bit tricky. It paid 2.5% annualized in distributions. HFR is quite a bit riskier as it holds more BBB corporates and is a bit more volatile. It seems like a decent place to park cash short-term if you don't mind the fairly low risk. XFR is very safe.


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## gibor365 (Apr 1, 2011)

andrewf said:


> HFR doesn't track an index which makes YTM a bit tricky. It paid 2.5% annualized in distributions. HFR is quite a bit riskier as it holds more BBB corporates and is a bit more volatile. It seems like a decent place to park cash short-term if you don't mind the fairly low risk. XFR is very safe.


yes, 30% in BBB bonds are riskier, but you get better return... 
What is it "Weighted Average Current Yield: 0.60%"?


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## james4beach (Nov 15, 2012)

andrewf said:


> XFR is decent for parking cash if you're concerned about CDIC limits. It mostly holds government of Canada bonds.


Not quite, I think their web page's pie chart is a bit misleading. XFR is (according to last quarterly portfolio disclosure)

55% federal agency (Housing Trust)
30% provincial
10% financial
4% other

There is not a single federal Government of Canada bond in XFR. There are lots of agency bonds and provincial bonds.


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## gibor365 (Apr 1, 2011)

I received answer from Horizons "The weighted yield-to-maturity of HFR as of February 22nd, 2013 is 2.12%", so 2.12 - 0.45 mer = 1.67%

for comparisson CBO YTM 1.9% - 0.28 mer = 1.62% , practically no difference, CBO has more quality bonds (not less than A), HFR - 1/3 BBB... both not much better than TDB8150 1.25%


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## andrewf (Mar 1, 2010)

I count Canada Housing Trust as fed gov't bonds. XSB is stuffed full of them, too.


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## andrewf (Mar 1, 2010)

HFR is designed to be insensitive to interest rates. So if/when rates rise, HFR's yield will rise without as large a hit to NAV. (XSB has 6x the duration/interest rate sensitivity).


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## gibor365 (Apr 1, 2011)

andrewf said:


> HFR is designed to be insensitive to interest rates. So if/when rates rise, HFR's yield will rise without as large a hit to NAV. (XSB has 6x the duration/interest rate sensitivity).


I see what you mean....

Started to check different bond ETF
Vanguard's Canadian Aggregate Bond Index ETF (VAB) doesn't look to bad , 2.3% YTM - 0.2 MER, 95% A and higher. 
Canadian Short-Term Corporate Bond Index ETF (VSC) , 2.2% YTM , 0.15 MER, much better than CBO, but quality is worse 18% BBB

What do you think about those?


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## andrewf (Mar 1, 2010)

VAB has a duration of 7 years (14x XFR) and VSC has a duration of 2.9 (6x XFR). To me, you're not getting paid much for the extra interest rate risk.


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## gibor365 (Apr 1, 2011)

XFR has duration 2.69 vs VSC 2.9, how did you come to 6X?


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## andrewf (Mar 1, 2010)

Sorry, I got mixed up with HFR which has a duration of ~0.5. XFR actually has a duration of <0.1. So multiply all the figures I gave by 5 to 6.


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## gibor365 (Apr 1, 2011)

andrewf said:


> Sorry, I got mixed up with HFR which has a duration of ~0.5. XFR actually has a duration of <0.1. So multiply all the figures I gave by 5 to 6.


I also got mixed up with duration...looked at different number  you are right XFR has <0.1... too bad Vanguard doesn't offer floating rate ETF as their MER x2-x3 less than competitors...

It's all about personal preference, but I think if 10K needed to be deployed into fixed-income, rather than put 100% into HFR/XFR, I'd put 5K into VSC and 5K leave in ATL5000. If interest rates rise -> so GIC rates rise and I can sell both and lock 10K in GIC...


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## andrewf (Mar 1, 2010)

If it's short term, I don't think it really matters


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## gibor365 (Apr 1, 2011)

andrewf said:


> If it's short term, I don't think it really matters


No, I think for a long term, at least 5-10years


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## gibor365 (Apr 1, 2011)

I think that some bond ETFs got pumped too much because majority retail investors don't care about YTM, but checking current yield and buying. This is probably why CBO current yield 4.4% and YTM less tnam 2%


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## andrewf (Mar 1, 2010)

I dunno. $10k is peanuts. I'm not sure it's worth agonizing over.


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## andrewf (Mar 1, 2010)

gibor, the bond funds are price takers. They are very small in relation to the bond market as a whole. So it's not the bond ETFs bidding up bond prices. Bond prices are high but investors are mistakenly buying the funds on the basis of the coupon rate.


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## gibor365 (Apr 1, 2011)

andrewf said:


> I dunno. $10k is peanuts. I'm not sure it's worth agonizing over.


I wrote 10K as an example  , but for sure it will be double digits amount  I just trying to make sure that fixed-income portion on all accounts (include HISA) will be at least 40%...

and the point is ...maybe we don't need such big fixed income allocation.... my wife is much younge and more agressive; she is advising to leave Cash just enough for 1 year living witout income and just to invest into growing stocks to acummulate shares (and future dividends).... but for me it's more phycological issue  and at the end of the day , it's me who click on Submit Order button ....


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## gibor365 (Apr 1, 2011)

Can amybody explain me please in simmple English what is the difference between Convertible bonds to regular bonds?
I reduced my bonds allocation, but still have CBO , I want to leave some allocation to short-term bonds ETF and was thinking maybe to replace CBO (with current ridiculous YTM = 1.85) with CVD - Advantaged Convertible Bond Index Fund or VSC.
CVD has shorted term and better YTM, but waht the hell is Convertible? Also , I couldn't find rating of this ETF.


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## Argonaut (Dec 7, 2010)

Simple English is that a convertible bond can be converted into shares of the underlying company at a certain price. I don't even want to wrap my head around how this would work in an ETF.


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## gibor365 (Apr 1, 2011)

Cool! But what CVD vs CBO?


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## andrewf (Mar 1, 2010)

Convertibles are basically a flavour of high yield debt.

I think you need to come to terms with the state of the bond market. There are no tricks or hidden asset classes that are clearly better than all the others. They are all trade-offs of risk vs reward...


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## gibor365 (Apr 1, 2011)

I understand, I just want to take a little bit more risk, meaning , a little higher YTM and a little higher duration ... still didn't get what rating is CVD? Do you mean it's closer to high-yield bonds?


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## HaroldCrump (Jun 10, 2009)

gibor said:


> I understand, I just want to take a little bit more risk, meaning , a little higher YTM and a little higher duration


IMO, that is yield chasing and not a risk worth taking.
If you are hungry for risk, you might as well take equity risk at this time.
If you want to be in bonds, better to stay short duration and safer ratings.



> still didn't get what rating is CVD? Do you mean it's closer to high-yield bonds?


CVD is a converible bond/debenture index.
It has mixed features of bonds and equities.
The conversion depends on how the underlying equity performs.

With convertibles, it is just as easy to fall into the trap of chasing yield and higher duration.
For smaller cap and more volatile equities, some may never reach their conversion price.
Just as an example, in the recent YLO re-structuring, the convertible holders pretty much got wiped out.
The straight bond holders got a decent share on the $ back.


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## gibor365 (Apr 1, 2011)

but in case of ETF with multiple holdings, one holding (like this YLO) shouldn't affect seriously ETF price....

I want to take a little more risk than short term like CBO and a little less than equity  this is how I came up with CVD, CAB, VSC...


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## andrewf (Mar 1, 2010)

I'm not sure convertible bonds do anything that a combination of investment grade bonds+equity would not do.

ie, 10% convertible ~= 7% CAB + 3% XIU?


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## gibor365 (Apr 1, 2011)

Also would like to know if for high-yield bonds, duration is matters? for example CSD Weighted Average Duration is 1.28 and for CHB - 4.33. Does it mean that CSD is a little safer?

Btw, even high-yield bonds look safer than equities, for example in 2008-09 HYG dropped more than 10% less than SPY


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## andrewf (Mar 1, 2010)

It has less interest rate risk. Shorter duration also means less time for things to go wrong (and companies to default).


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## HaroldCrump (Jun 10, 2009)

gibor said:


> Btw, even high-yield bonds look safer than equities, for example in 2008-09 HYG dropped more than 10% less than SPY


No, it is a different type of risk.
2008 - 2009 was a low rate environment, and a steadily falling rate environment.
You cannot use an equity market correction period to assess the interest rate risk of bonds.

It seems to me that you are expecting equity like returns through bonds by going further and further out on the duration curve, and lower and lower on the quality curve.

Keep in mind that convertible bonds are higher yield for a reason - there is no magic here.
Look down the list of companies that comprise the CVD, and you will see the reason.
How many bonds of RY, BNS, TRP, BCE, etc. do you see in there?
There is a reason these companies are issuing convertible debt for such high yields....


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