what did i buy ?

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Topic Author
shuresm7b1
Posts: 249
Joined: Mon Aug 08, 2016 5:28 am

what did i buy ?

Post by shuresm7b1 »

I was trying to buy 1 yr and 2 yr bonds and was trying to get all the income at the end. My understanding is that with zero coupon bonds they have phantom interest that I would still pay tax on during the bonds life but I was hoping to get as little income up front and the bulk at the end if possible.

I spoke to Vanguard and they made recommendations but now I'm getting interest payments twice a year and don't know why. I called Vanguard back but didn't get clarity so here I am if anyone can help.

cusip: 912828ZT0 and 91282CCF6

Thank you for any ideas on what I bought and if there are any other 1 or 2 yr bonds that DO defer the bulk of the money until the end.
7eight9
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Re: what did i buy ?

Post by 7eight9 »

912828ZT0 is a 5 year Note that pays interest the last calendar day of May and November --- https://treasurydirect.gov/instit/annce ... 0521_4.pdf

91282CCF6 is a 5 year Note that pays interest the last calendar day of May and November --- https://treasurydirect.gov/instit/annce ... 0520_7.pdf

You wanted to buy Zeros.
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Svensk Anga
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Re: what did i buy ?

Post by Svensk Anga »

You bought Treasury Notes with coupon rates of 0.25% and 0.75%. They are 5 year notes issued 4 and 3 years ago (so have 1 and 2 years left to maturity) and the coupon rates are just under the interest rates for this term prevailing at the time.

Since 1 and 2 year Treasury yields are running near 5%, you are getting most of your return from price appreciation rather than coupon payments.
ehh
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Re: what did i buy ?

Post by ehh »

Well, I stick to bond mutual funds, but it appears you bought 5 year US Treasury notes. One set maturing May 31, 2025 and the other set maturing May 31, 2026 https://treasurydirect.gov/instit/annce ... 0521_4.pdf https://treasurydirect.gov/instit/annce ... 0520_7.pdf paying interest on last day of November and last day of May. Not much interest, but a little.

I assume you paid somewhat less than par for these bonds. On the last day of May 2025 and the last day of May 2026 the US Treasury will pay the par value of your bonds. Hence, most (I assume most) of your income will be in 2025 and 2026 when the bonds mature.
Last edited by ehh on Sun Jun 09, 2024 9:52 am, edited 1 time in total.
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22twain
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Re: what did i buy ?

Post by 22twain »

What did you pay for those bonds, and what will you get when they mature (i.e. the par value)?
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Topic Author
shuresm7b1
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Joined: Mon Aug 08, 2016 5:28 am

Re: what did i buy ?

Post by shuresm7b1 »

Thanks so much for the great replies. I'd have to lookup what we paid but yes they were bought at a discount and we'll get the par value at maturity. So what's the best way to find bonds that pay as much as possible at the maturity date and the least amount during the term? Thanks again kind Bogleheads ! :beer
BirdFood
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Re: what did i buy ?

Post by BirdFood »

shuresm7b1 wrote: Sun Jun 09, 2024 12:45 pm Thanks so much for the great replies. I'd have to lookup what we paid but yes they were bought at a discount and we'll get the par value at maturity. So what's the best way to find bonds that pay as much as possible at the maturity date and the least amount during the term? Thanks again kind Bogleheads ! :beer
Very roughly how much money are we talking about? (For example, every penny of the earnings of iBonds is delayed until you cash them in, but you can only buy 10K a year.)

And what timeline? You were misinformed about zero-coupon bonds—they pay it all at the end. But T-bills, the most obvious example, only go out 52 weeks. (Rereading your post, I see you are interested in 1 year. So maybe T-bills.)

If you want multiple years, what you did—notes or bonds with low interest and high discount—may indeed be the best plan.
Topic Author
shuresm7b1
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Re: what did i buy ?

Post by shuresm7b1 »

The amount to invest is 300k with durations from 1 to 5 yrs. So the bonds I got were not zero coupons right ? I'm ok with what I have but just want to learn so I can make better choices when they mature. Thank you again.

What I own now:
912828ZT0 is a 5 year Note that pays interest the last calendar day of May and November ---

91282CCF6 is a 5 year Note that pays interest the last calendar day of May and November ---
BirdFood
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Re: what did i buy ?

Post by BirdFood »

shuresm7b1 wrote: Sun Jun 09, 2024 1:48 pm The amount to invest is 300k with durations from 1 to 5 yrs. So the bonds I got were not zero coupons right ? I'm ok with what I have but just want to learn so I can make better choices when they mature. Thank you again.

What I own now:
912828ZT0 is a 5 year Note that pays interest the last calendar day of May and November ---

91282CCF6 is a 5 year Note that pays interest the last calendar day of May and November ---
I’m curious—is the issue with income about taxes, or is it about not wanting to have to putter with receiving and reinvesting income? That could slightly affect the solution.

For example, if it’s about puttering, maybe you could auto-invest those incoming interest payments into something—say, iBonds. 10K per year is small change in terms of 300K, but it might be enough (I think it would be enough) to absorb the interest from low coupons. You could predict the incoming interest, set up an auto-transfer and auto-buy at Treasury Direct for slightly after those dates, and ignore it for a while.
rbd789
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Re: what did i buy ?

Post by rbd789 »

I believe what you were looking for are strips. I have no personal experience with them but I understand you can buy the individual coupons or the stripped principal without the coupons. It sounds like you were looking for the latter.

A description of strips, from TreasuryDirect. Note that they are only sold at brokerages.

https://www.treasurydirect.gov/marketab ... es/strips/
bombcar
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Re: what did i buy ?

Post by bombcar »

STRIPS are what you want but I do not know if the stripped principle is tax ignored until sale.
Topic Author
shuresm7b1
Posts: 249
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Re: what did i buy ?

Post by shuresm7b1 »

BirdFood wrote: Sun Jun 09, 2024 1:54 pm

I’m curious—is the issue with income about taxes, or is it about not wanting to have to putter with receiving and reinvesting income? That could slightly affect the solution.

For example, if it’s about puttering, maybe you could auto-invest those incoming interest payments into something—say, iBonds. 10K per year is small change in terms of 300K, but it might be enough (I think it would be enough) to absorb the interest from low coupons. You could predict the incoming interest, set up an auto-transfer and auto-buy at Treasury Direct for slightly after those dates, and ignore it for a while.
I am planning to do large roth conversions from trad ira to roth so trying to minimize taxable income so I can convert more.
bombcar
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Re: what did i buy ?

Post by bombcar »

If the interest is charged to the tax year it doesn’t matter if you get the cash or not. I bondage may be your only option
Topic Author
shuresm7b1
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Re: what did i buy ?

Post by shuresm7b1 »

yes, I was just trying to learn how to buy bonds that returned the smallest amount of interest up front and more from the discount on par value if that's possible. ibonds don't give me much room with ~10k limits so I don't think I'll buy them again.
Harmanic
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Re: what did i buy ?

Post by Harmanic »

shuresm7b1 wrote: Sun Jun 09, 2024 12:45 pm Thanks so much for the great replies. I'd have to lookup what we paid but yes they were bought at a discount and we'll get the par value at maturity. So what's the best way to find bonds that pay as much as possible at the maturity date and the least amount during the term? Thanks again kind Bogleheads ! :beer
Find 30 year bonds that have a coupon rate near 0% and are heavily discounted. You should be getting close to 4.5%.

Savings bonds are even better. No interest paid until you cash them in, up to 30 years later.
The question isn't at what age I want to retire, it's at what income. | - George Foreman
zero_coupon
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Re: what did i buy ?

Post by zero_coupon »

BOXX (Treasury-like returns, no interest payments...so far)
SPIA (you'll be penalized if under the age threshold, unless you keep it rolling)
Topic Author
shuresm7b1
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Re: what did i buy ?

Post by shuresm7b1 »

Harmanic wrote: Sun Jun 09, 2024 4:25 pm
shuresm7b1 wrote: Sun Jun 09, 2024 12:45 pm Thanks so much for the great replies. I'd have to lookup what we paid but yes they were bought at a discount and we'll get the par value at maturity. So what's the best way to find bonds that pay as much as possible at the maturity date and the least amount during the term? Thanks again kind Bogleheads ! :beer
Find 30 year bonds that have a coupon rate near 0% and are heavily discounted. You should be getting close to 4.5%.

Savings bonds are even better. No interest paid until you cash them in, up to 30 years later.
Thanks. That helps a lot. I'm currently doing 1 to 2 year atm and don't think yields pay enough to commit to 30 yr bonds though. If the bond vigilantes go nuts that could change.
Topic Author
shuresm7b1
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Re: what did i buy ?

Post by shuresm7b1 »

zero_coupon wrote: Sun Jun 09, 2024 4:27 pm BOXX (Treasury-like returns, no interest payments...so far)
SPIA (you'll be penalized if under the age threshold, unless you keep it rolling)
Bond funds like BOXX and Bond Bloxx are interesting to me but I don't understand them. Like how does a 5 year fund change if interest rates go from 5 to 8 or 5 to 3 after say 6 months of owning them ? I find them hard to wrap my head around including tax implications. If they could make sense to me that would save me the effort of reinvesting.

https://bondbloxxetf.com/bondbloxx-bloo ... asury-etf/
bombcar
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Re: what did i buy ?

Post by bombcar »

Risk with anything that doesn’t mature at your stated timeframe is that interest rate changes will affect you (even if zero coupon). So beware the 30s.
Topic Author
shuresm7b1
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Re: what did i buy ?

Post by shuresm7b1 »

bombcar wrote: Sun Jun 09, 2024 5:18 pm Risk with anything that doesn’t mature at your stated timeframe is that interest rate changes will affect you (even if zero coupon). So beware the 30s.
Absolutely and thanks !
LotsaGray
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Re: what did i buy ?

Post by LotsaGray »

shuresm7b1 wrote: Sun Jun 09, 2024 12:45 pm Thanks so much for the great replies. I'd have to lookup what we paid but yes they were bought at a discount and we'll get the par value at maturity. So what's the best way to find bonds that pay as much as possible at the maturity date and the least amount during the term? Thanks again kind Bogleheads ! :beer
Without buying zero coupons you probably did by near the best choice. Your interest rates are 0.25% and 0.75%. Not sure when you purchased but if you bought a current 1 yr you would be betting 5% as interest and you are getting less than 1% inter3st income. As you note if you did buy zeros you would incur the phantom income
bongo
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Re: what did i buy ?

Post by bongo »

shuresm7b1 wrote: Sun Jun 09, 2024 2:30 pm I am planning to do large roth conversions from trad ira to roth so trying to minimize taxable income so I can convert more.
Are you just planning conversions for this year? otw I don't see how 1-2 year treasuries help at all. That will just defer the interest till the next 2 years and leave less room for more conversions then. If you want to do conversions for X years, you need buy an X-year treasury with as low a coupon as possible (no strips either).

eg. say you could get a 5-6 year tnote with ytm of 4.5% and a .5% coupon. On 300k you'd only collect 1.5k interest each year, and defer about 12k a year till maturity. (does the 12k extra room make enough difference for the conversions you want to make?) In the year of maturity, you would have a big jump in income, maybe 70k-ish.
Topic Author
shuresm7b1
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Re: what did i buy ?

Post by shuresm7b1 »

Yeah I have to do conversions for the next couple of years so your advice makes total sense and I really appreciate it. I need to match the x years. Thank you again for the great information
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welderwannabe
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Re: what did i buy ?

Post by welderwannabe »

You need to pay tax on the imputed interest on STRIPS every year. This is not the case with short term treasurys 1 year or less. You can chose to pay tax on the imputed interest (assuming it crosses a tax year) or not. Your choice.
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