Callable Bond Offering:

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Callable Bond Offering:

Post by Nowizard » Thu Oct 11, 2018 9:10 am

TD Ameritrade is offering callable bonds at a rate of 3%, moving to 4% on October 26. I am not familiar with this approach other than knowing they can be called anytime by the issuer. What are the advantages and disadvantages of such investment? Are there charges by the selling firm for purchase?


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Re: Callable Bond Offering:

Post by grabiner » Thu Oct 11, 2018 5:17 pm

It's likely not a good deal for reasons which have little to do with the quality of the bonds. Unless you hold Treasury bonds (or possibly general-obligation state bonds), you want to hold a diversified bond portfolio, so that you are not overexposed to the credit risk of a single issuer.

If you do want to buy a callable bond, you need to look at the call provisions. The offering should say something like "30 years at 4%, callable after 10 years at 102." This means that the issuer can pay 102% of par value to call the bond after ten years. If it is called, you have a 10-year bond which yielded 4.2%; if it doesn't happen, you have a 30-year bond which yields 4%. As an investment, the bond will have risk somewhere between the two, with effective maturity and duration lengthening if rates rise. And you should be getting a premium for the call provision; if you could buy a 10-year bond from the same issuer with no call provision, it would have to yield significantly less than 4.2%. You will have to evaluate these things.

Bond funds do evaluate these issues. Since most munis are callable, a fund like Vanguard Long-Term Tax-Exempt computes its own effective duration based on the probability that the munis it holds will be called.
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Re: Callable Bond Offering:

Post by prudent » Thu Oct 11, 2018 6:09 pm

Topic moved to Investing - Help with Personal Investments.

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