(As you read this shift back and forth between this page and the various Shop4BondsSM pages by pressing the "Alt" and "Tab" buttons at the same time to switch between browser windows.)
This Blue color is the color of all the terms that you will find on the Shop4BondsSMpages. So when you see this color in the text below, it should guide you tothe term or window on the Shop4BondsSMpages.
Once you log in with your email address to the Shop4BondsSM portion of the site, you arrive at a screen that says in bold: "PLEASE SELECT BOND TYPE", where you have a choice of four basic bond types:
| Municipals | These are issued by cities, states, counties, and towns and are generally not subject to federal income tax. In general, these are a good choice for individuals in their primary investment accounts. |
| Corporates | These are issued by major corporations. Corporate interest is generally taxable at all three levels: Federal, State and Municipal. Therefore for individuals it is usually best to keep them in tax deferred accounts such as IRAs or 401-Ks. |
| Zero Coupons |
These are a unique class of bonds, issued with a steep original discount and paying NO regular coupon interest, but maturing at full face value of $1000.(Think of buying a dollar in ten years while only paying pennies for that dollar today.) Many are issued by the United States Treasury, and all have an important tax consideration for holders: while no interest is paid, the Treasury imputes a yearly taxable interest amount (called OID Interest) to holders. So even though you receive NO interest income the imputed interest stream is fully taxable. Largely for this reason "zeros" are usually best held in tax free or tax deferred accounts. |
| Treasury |
These are direct obligations of the United States Government and are generally regarded as the safest bonds in the world. Interest from Treasury notes and bonds is not taxed by States, though their interest is subject to federal income tax. |
Choose Corporates by clicking on it from Please Choose Bond Type screen.
Up pops a screen called Corporate Bond Search that displays several boxes and squares, organized into three primary columns. With your keyboard you can enter information in the boxes and left-click your mouse over specific squares and arrows to further refine your search. Most of these entry choices are easy to understand, but some are not particularly intuitive, so as we go along each one will be explained.
Let's skip over Express Search (top left-hand corner) for now because we want to discover what Shop4BondsSM can deliver from a large and generalized search.
So let's get a feel right now for what's available!
Follow these Steps:
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The top two rows contain essential and fixed descriptive bond detail. The bottom two rows contain updated market information that goes into the bond's price |
The FIXED parts of the bond
The first row across the top of screen displays four basic and unchanging descriptive terms about a specific bond issue:
First, the abbreviated name of the issuer.
Second, whether or not the bond is callable.
Third is Coupon - This is the annual interest rate to be paid on the bond by the issuer, expressed as a percentage of the bond's $1000 face value.
A fixed coupon of 5.80% means an annual total of $58 interest due on each bond, for example $1000 x 0.058 = $58. (See also Frequency and Dated Date below.)
Bonds used to actually have pieces of paper attached to them called "coupons" that bondholders literally had to detach and present physically-- in person-- to the bank in order to get paid interest!
(Whence the term "coupon clippers": this century-old slang expression refers to wealthy individuals who merely clip their bond coupons and, in "polite society" make their "collection rounds", taking the clipped coupons regularly to the bank for payment, essentially living off the bond interest stream. This is something to think about as motivation to learn more about bonds.)
Fourth is the bond Maturity - This is the specific date that the issuer of the bond has contracted with all the holders to pay back (redeem) face value, along with the final interest payment due (or, in the case of zero coupons, the face amount only).
The maturity date is very important. Generally the longer the maturity of a bond the higher the coupon amount that must be paid -- it has more risk.
Simply put, the longer a bond is outstanding the more chance the issuer may run into some trouble paying it off.
Secondly, if market interest rates were to rise to a substantially higher level for the type of bond you own, and if you have to sell the bond, it is very likely you will have to do so at a discount (loss) from your initial cost. Conversely, if interest rates go down after you have purchased a bond -- and you want to sell it -- then you may receive more than you initially paid.
This effect, the impact upon price of changes in interest rates, is called "Volatility". The longer the maturity of a bond, the more Volatility it is said to have. Volatility, however, will be generally meaningless to the holder wishing to hold the bond until maturity or its "pay off" date.
Okay, that first row of the Corporate Bond Detail screen was easy, pretty much a straightforward "name, rank and serial number".
Let's continue into the "full" description in the second row, where we'll find information grouped in three columns across that row. Starting again at the left-hand side of the screen, work your way down each column and across the row.
Under Description appears more fixed terms of the bond:
CUSIP - Acronym for "Committee on Uniform Security Identification Procedures". This is the bonds identifier number, and is a unique number for all securities just like your social security number is a unique number for you. When you get specific about a bond with someone you should always agree that you are talking about the same CUSIP number. (See cusip.com for more information.)
Listed - This means is this bond listed on the New York Stock Exchange or American Stock Exchange. In our view whether or not a bond is listed is somewhat irrelevant to the purchaser because most "listed" bonds do not trade everyday and if they don't trade, they don't appear in the transactions lists the next day.
Ratings - The letters before the forward slash are Moody's and after the slash are Standard and Poors. Ratings are an attempt to measure the risk of being paid on time on the bond. For ratings parameters please see the button on the left of our home page called Valuable Links.
Industry - This is the industry group in which the issuer generally provides services. Though not required in a bond's description, the issuer's industry group can provide useful reference information. For example, there is always some industry group doing better or worse than others, and this can effect the price of bonds from other companies within that grouping. Great values can sometimes be had by purchasing bonds from an out-of-favor industry -- if you have faith in that industry group. This can be because the market interest rates for out-of-favor groups, both for new and discounted bonds in the secondary markets, can be much higher than for favored groups.
Dated Date - This repetitive and funny-sounding term is very deliberate, and means only one point in time: the date the bond was issued and first began owing interest. It is only really important as a date if the bond has not yet made its first interest payment, since the dated date will determine the starting point for counting interest days forward to first scheduled coupon date. Simply, the size of that first coupon payment can be smaller or larger since the interest period is either shorter or longer than the normally fixed payment periods. All other coupon payments are equal on most bonds (see Pay Frequency).
Delivery - This will specify either book entry or physical. Book Entry means the bonds are held in "safekeeping" for you by your broker or bank and shown on your regular statement of account. Physical means you can take actual delivery of the bond and have it registered in your name so that the interest and principal payments are mailed to you. Today most bonds are in book entry form, and most dealers will not handle physical delivery at all.
Pay Frequency - How often the bond will pay interest during each year. It is usually semi-annually, but nowadays many bonds pay monthly or quarterly. If the bond is a "zero coupon" bond it will pay only upon the maturity date. (see Zero Coupons)
First Coupon - The first regularly scheduled interest payment for this particular bond, or the first time that the issuer had to pay interest. (Don't confuse with Dated Date)
Call Schedule - This shows the dates and prices (always a percentage of face value) at which the issuer can pay the bond off early. Many times the issuer must pay you a premium if he calls the bond early; this must be shown in the schedule. It is also standard to state if the bond can be called at any time (continuously) after a certain date, or whether only upon specific dates (such as coupon dates) or any other such conditionings of redemption (such as partial, or "discrete" all-or-none calls). Generally speaking, calls are not in favor of you, the owner of the bond, because the only time an issuer calls bonds is when cheaper money -- lower than his interest cost on the bond -- can be found. If this occurs, you get dumped out of your bond holding by getting your money back, and then generally must hunt around for new bonds in a lower interest rate market. Because of this "call" risk, callable bonds often will not show appreciation in price over par value, and can often be more heavily discounted in secondary markets. The call feature operates here like a ceiling or lid on rising value, so it is generally better overall to buy non-callable bonds when you can.
Let's look more closely now at the moving parts, on the Corporate Bond Detail screen, the changing market information about the bond's value that quite simply moves around the fixed parts. It all comes together into the bond's price, and begins with the specific Offer Information:
Offer Quantity - This is the total offered amount of this particular bond from one particular dealer. There may be other lots (quantities) of the same bond offered by another dealer, and there may be price differences Shop4BondsSM helps you now to surface these hidden values. For this 1 means $1,000; 10 means $10,000; 100, means $100,000 and so forth.
Minimum - When we initiated the Search Bonds function, the bond lists that were produced sometimes had the word " Min " listed underneath quantity. This number shows the smallest number of bonds the offering dealer is will to sell. Generally, it is futile to try to buy fewer than the minimum order posted. Again 1 means $1000 and 10 means $10,000 etc.
BUT, often due to inflexible transaction costs for small order sizes (called ticket charges), bargains can be frequently found, an insight to put to work for you.Small bond lots must generally be offered at lower prices -- which means higher interest rates -- than comparatively larger quantities of bonds. This can occur because a dealer wants to "clean up his inventory sheets", where small positions can clog up the dealer's offerings and tie up capital. So exceptional values can sometimes be found when you shop for small bond lots offered by a "motivated seller" at what are "clearance" prices.
Order Quantity - This is the specific bond quantity that you wish to buy. You can change the amount shown in the white box (go ahead and enter different quantity values - don't worry, it won't hurt anything - so you can see the pricing change). Please note that if you change the quantity the price may change (Generally, we have set price breaks at $50,000 (50), $250,000(250), and 500,000(500) face amount of bonds. Use this button and change the order quantity and you can estimate your savings per bond if you buy a larger amount. Institutional customers pay far less per bond than retail customers because the basic transaction costs are spread over a larger quantity Sort of like buying at a warehouse rather than a neighborhood store.
Settlement Date - Customary settlement is THREE business days, and all posted offers will typically reflect interest calculations done for "regular way" settle.
Settlement is the date your brokerage account would be debited for the purchase cost, or simply the date you actually pay for the bond.Settlement is also the date used to figure any accrued interest that you may owe the selling bondholder (see Accrued Interest below). The reverse is also true: if you are the seller, settlement is the day when you would receive both principal proceeds and accrued interest.
Everything specified in the first THREE rows - Maturity, Coupon, Quantity, Ratings, Settlement, Dated Date, Pay Frequency - figures into the ORDER PRICING:
Price - This is the percentage of $1,000 dollar face value of the bond that the dealer is offering to sell it for. This includes no mark-up of any kind for J. W. Korth & Company. As your agent we transparent agency fees that can be found under Services and Costs on the left hand menu of our home page.
Current Yield : This is the yield you receive on the actual dollars invested each year. To calculate it you simply divide the Coupon amount by the Price you pay for a bond. For instance a bond with a 8.0% coupon bought at a Price of 105.0% has a current yield each year of 7.61%. But be very careful here. This is not the real yield on your money. This is because at the bond's maturity you will only be paid par or 100% when the bond cost you 105%!! Yield to Mat solves this problem below.
Yield to Mat : This is a mathematical calculation, accepted by the entire investment
industry, that takes in to account not
only the Current Yield, but also the difference
over the time remaining until the bond is paid by its issuer of any discount
from 100% or premium over 100% that you pay for the bond. Our traders will
calculate the Yield to Mat for you.By securities industry rules all
confirmations of transactions to customers must have this calculation appear
and it is the industry standard for
measuring the return on your money and comparing bonds among one another.
Generally speaking, the more risk or lower rating on a bond the higher will be
its Yield to Mat.
Yield to Call : Just like Yield to Mat this is a
calculation of the return on your money taking in the discount from 100% or premium
over 100% you pay for a bond along with its Current
Yield, if the issuer decides to use its option to call the bonds early
and pay you 100% of their face amount plus interest owed plus a call premium
sometimes as high as 8.0%.
Principal : This is the amount of money you will pay for the bond before Accrued Interest is added. It is calculated by taking the Price in a percentage times the number of bonds you want to purchase.For instance, if you want to buy 50 bonds at a Price of 88.50%, you must pay $44,250 for the Principal of the bond.I find an easy way to think about this is that 88.5% actually means $885.00 for each bond.Likewise, a 92.226% Priceis equivilant to $922.26 for each bond. Then you multiply this amount times your purchase number.
Accrued Interest : This is the amount of interest the issuer owns on the bond based on
the number of days since he made his last interest payment. The holder you are
buying the bond from is owned that money until the day he sells it to you and
this is how he gets paid. If you have ever bought a house and accrued the taxes
owed from the seller to you or vice versa it is very similar.
| © J. W. Korth & Company, 2005. All rights reserved. Shop4BondsSM is a Service Mark of J. W. Korth & Company. |