Microsoft bond

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owenmia
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Microsoft bond

Post by owenmia » Thu Jul 04, 2019 11:26 pm

This bond is a Microsoft AA rated bond with a 5.3% coupon. Nice.

The maturity date is 2041.

One thing I don’t understand is this:
Bonds with a distant term maturity rate are supposed to return more as a payoff for such a distant maturity rate.

However, you can sell bonds anytime and from what I see I usually only lose about 50 or a hundred bucks on a $10,000 bond when I sell bonds before their due date.

So could that change? Is that rare that it is easy to sell bonds before maturity with little or no loss?

KyleAAA
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Re: Microsoft bond

Post by KyleAAA » Fri Jul 05, 2019 12:53 am

It depends entirely on the prevailing interest rate. Bond prices move inversely with rates. If rates double, you will see a big move.

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Tyler Aspect
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Re: Microsoft bond

Post by Tyler Aspect » Fri Jul 05, 2019 12:55 am

There is no assurance by year 2041 there would even be a company called Microsoft. The pace of the computer industry evolves at such a fast clip that you cannot tell if any company will stick around beyond a span of 5 to 10 years. The standard Bogleheads bond holding remains the total bond index.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

Call_Me_Op
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Re: Microsoft bond

Post by Call_Me_Op » Fri Jul 05, 2019 6:53 am

owenmia wrote:
Thu Jul 04, 2019 11:26 pm
This bond is a Microsoft AA rated bond with a 5.3% coupon. Nice.

The maturity date is 2041.

One thing I don’t understand is this:
Bonds with a distant term maturity rate are supposed to return more as a payoff for such a distant maturity rate.

However, you can sell bonds anytime and from what I see I usually only lose about 50 or a hundred bucks on a $10,000 bond when I sell bonds before their due date.

So could that change? Is that rare that it is easy to sell bonds before maturity with little or no loss?
Personally, I would not be comfortable with the idea of holding such a bond to maturity. You can sell at any time, but for a price you cannot predict today. There is a good reason why Bogleheads prefer broad diversification.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

curious george
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Re: Microsoft bond

Post by curious george » Fri Jul 05, 2019 7:13 am

That’s how much you would lose selling it now. However, if MSFT would get into trouble, then their bond values would drop much more.

There is no free lunch - so you are taking risk on time (who knows what interest rates will be that far into the future) and company - who knows what will happen to Microsoft.

Hence, the higher rate - if they could sell the bond and only pay 3%, I am sure Microsoft would be happy to do it.

A different question is - is it worth the risk for you.
Most of us would probably favor a diversified bond fund

jebmke
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Re: Microsoft bond

Post by jebmke » Fri Jul 05, 2019 7:56 am

5.3% is the coupon rate. What is the current YTM - that is more indicative? However, holding individual corporate bonds is risky unless you have a lot off different issues which is way too much work for me.
When you discover that you are riding a dead horse, the best strategy is to dismount.

Boglegrappler
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Re: Microsoft bond

Post by Boglegrappler » Fri Jul 05, 2019 8:28 am

That Bond is trading at a large premium. Yield to maturity is 3.2% currently.

THe bond was issued (sold) by Microsoft in Feb 2011.
Last edited by Boglegrappler on Fri Jul 05, 2019 8:40 am, edited 1 time in total.

Broken Man 1999
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Re: Microsoft bond

Post by Broken Man 1999 » Fri Jul 05, 2019 8:37 am

Boglegrappler beat me to the info.

Good size premium, indeed.

The link below has more info.

https://markets.businessinsider.com/bon ... 594918am64

Now I suppose if interest rates are really squashed down, one might be able to squeeze a bit of premium out for themselves.

Broken Man 1999
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ericcohen
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Re: Microsoft bond

Post by ericcohen » Fri Jul 05, 2019 2:58 pm

As noted, this bond would not be paying you 5% if you went into the market and bought it now.

Consider instead buying a longer duration corporate bond etf like VCLT (vanguard long term corporate bond etf). Same investment thesis, nice yield, and better diversification.

:sharebeer

illumination
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Re: Microsoft bond

Post by illumination » Fri Jul 05, 2019 3:41 pm

The "boglehead" move would be to sell, take the premium, and and reinvest those additional dollars it into a diversified bond fund.

Honestly though, I would have no trouble sleeping holding a bond from Microsoft paying me 5% plus. Unless there was zero tax consequence, I could see myself holding it unless it was a large part of my portfolio. In fact, that's probably what I would lean towards because I think interest rates are going to stay low for a long, long time. But that's speculation and "nobody knows nothing".

If you want to get depressed though, look at how much you would have made on the Microsoft stock had you bought it instead of Microsoft bonds.

Broken Man 1999
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Re: Microsoft bond

Post by Broken Man 1999 » Fri Jul 05, 2019 4:01 pm

I also have regrets because I didn't buy more Microsoft when it was averaging me about $50/share. :(

Broken Man 1999
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welderwannabe
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Re: Microsoft bond

Post by welderwannabe » Fri Jul 05, 2019 6:12 pm

Tyler Aspect wrote:
Fri Jul 05, 2019 12:55 am
There is no assurance by year 2041 there would even be a company called Microsoft. The pace of the computer industry evolves at such a fast clip that you cannot tell if any company will stick around beyond a span of 5 to 10 years. The standard Bogleheads bond holding remains the total bond index.
This. +1

This is why I keep my corporate bonds to short duration. A lot can happen in 22 years.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

Topic Author
owenmia
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Re: Microsoft bond

Post by owenmia » Wed Jul 10, 2019 11:02 am

Yeah. I was thinking I can always sell it before maturity with little or no loss, that the value won't change dramatically. Never did this before.

Topic Author
owenmia
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Re: Microsoft bond

Post by owenmia » Wed Jul 10, 2019 11:03 am

The crazy thing is they have AAA rated bonds at like 8%!

But my broker friend said do not buy it, NEVER take over 5% because there is something wrong with it.

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Tyler Aspect
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Re: Microsoft bond

Post by Tyler Aspect » Thu Jul 11, 2019 1:09 am

owenmia wrote:
Wed Jul 10, 2019 11:02 am
Yeah. I was thinking I can always sell it before maturity with little or no loss, that the value won't change dramatically. Never did this before.
Bond pricing react instantly to bad news. By the time you hear of the bad news the price has already moved. Do not count on being able to sell the bond before everything tanks.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

bluquark
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Re: Microsoft bond

Post by bluquark » Thu Jul 11, 2019 2:20 am

Aside from MSFT solvency, another type of bad news that would instantly harm the resale value of this bond would be a rise in interest rates or a well-founded expectation that interest rates will rise (typically, because of inflation). Other investors will not be impressed with this yield if the market is awash in bonds that yield 10%, and they'll commensurately pay you less for it. This risk equally affects diversified long-term bond funds like VCLT.

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