Trying to understand individual bond

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faltuk1
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Trying to understand individual bond

Post by faltuk1 »

Here is the listing of AIG bond from Fidelity, showing yield to ask of 7.3%. Considering that AIG is owned by US govt, isn't it a good buy?

AMERICAN INTL GROUP INC MTN BE 5.45000% 05/18/2017FR
tonythered
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Post by tonythered »

If the yield is that high, it's because the market assumes there is a good deal of risk in holding this particular bond.

The only individual bonds a low-net-worth investor should own are US Treasuries/TIPS, as they are guaranteed to be repaid. Better to stick with bond funds to diversify into corporate issues.
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nisiprius
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Re: Trying to understand individual bond

Post by nisiprius »

faltuk1 wrote:Here is the listing of AIG bond from Fidelity, showing yield to ask of 7.3%. Considering that AIG is owned by US govt, isn't it a good buy?

AMERICAN INTL GROUP INC MTN BE 5.45000% 05/18/2017FR
I don't know what AIG's relationship to the U. S. government is. It's probably pretty complicated.

7-year Treasuries are yielding something like 3%.

If a bond is paying 5.45%, which is an awful lot more than Treasuries, but buyers are only willing to pay $90 for something that cost $100 when it was issued, I'd say to myself "I don't understand this, and I don't invest in anything I don't understand." Of course, I don't invest in individual bonds.

So, what are all these little symbol thingies over at the right? IE, CP, PP, RO, SFP?

Image

Let's see... RO seems to mean "risk outlier."

Image

So, I think Fidelity is giving you some kind of warning here. I sure don't understand it, though. Do you?

If you are familiar enough with bonds and bond trading that you can explain a "risk outlier" to me--and explain why you are not worried about it--and explain why this thing is selling for $0.90 on the dollar--then I'd guess you're enough of a bond trader to be considering individual bonds, and for all I know you've actually found a diamond in the rough. But unless you like risk and what you're doing and have lots of other bonds in case this one is a stinker, I'd assume "RO" is a warning that should be taken seriously.

I don't think you can do this stuff safely just by clicking on a brokerage screening tool and looking for high numbers.
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Topic Author
faltuk1
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Joined: Thu Oct 09, 2008 9:58 am

Re: Trying to understand individual bond

Post by faltuk1 »

nisiprius wrote:
faltuk1 wrote:Here is the listing of AIG bond from Fidelity, showing yield to ask of 7.3%. Considering that AIG is owned by US govt, isn't it a good buy?

AMERICAN INTL GROUP INC MTN BE 5.45000% 05/18/2017FR
I don't know what AIG's relationship to the U. S. government is. It's probably pretty complicated.

7-year Treasuries are yielding something like 3%.

If a bond is paying 5.45%, which is an awful lot more than Treasuries, but buyers are only willing to pay $90 for something that cost $100 when it was issued, I'd say to myself "I don't understand this, and I don't invest in anything I don't understand." Of course, I don't invest in individual bonds.

So, what are all these little symbol thingies over at the right? IE, CP, PP, RO, SFP?

Image

Let's see... RO seems to mean "risk outlier."

Image

So, I think Fidelity is giving you some kind of warning here. I sure don't understand it, though. Do you?

If you are familiar enough with bonds and bond trading that you can explain a "risk outlier" to me--and explain why you are not worried about it--and explain why this thing is selling for $0.90 on the dollar--then I'd guess you're enough of a bond trader to be considering individual bonds. I certainly am not.

I don't think you can do this stuff safely just by clicking on a brokerage screening tool and looking for high numbers.
Since I don't understand thats why I have still not bought it :-). The idea is to understand with the help of knowledgeable people on this board. If the crooks on wall street can understand and make gazillion dollors, I am sure we can all figure out how to assess individual bonds.
Valuethinker
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Re: Trying to understand individual bond

Post by Valuethinker »

faltuk1 wrote:Here is the listing of AIG bond from Fidelity, showing yield to ask of 7.3%. Considering that AIG is owned by US govt, isn't it a good buy?

AMERICAN INTL GROUP INC MTN BE 5.45000% 05/18/2017FR
At a guess there is a risk of being called early.

It's a Medium Term Note, rather than a bond, which has its own legal meaning. Not sure if they are the same from an investor point of view.

Note AIG is controlled by US government but it has never been nationalized. That's an important distinction. If the US government walked away, it would lose its investment, but nothing more. No recourse on US Treasury.
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faltuk1
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Re: Trying to understand individual bond

Post by faltuk1 »

Valuethinker wrote:
faltuk1 wrote:Here is the listing of AIG bond from Fidelity, showing yield to ask of 7.3%. Considering that AIG is owned by US govt, isn't it a good buy?

AMERICAN INTL GROUP INC MTN BE 5.45000% 05/18/2017FR
At a guess there is a risk of being called early.

It's a Medium Term Note, rather than a bond, which has its own legal meaning. Not sure if they are the same from an investor point of view.

Note AIG is controlled by US government but it has never been nationalized. That's an important distinction. If the US government walked away, it would lose its investment, but nothing more. No recourse on US Treasury.
Searching on google, it looks the difference between notes and bonds is that bonds is longer maturity and notes are up 10 year maturity. Other than that there seems to be no difference.

Also, based on the description on Fidelity, how do I know if it is a secured or unsecured note/bond?
Topic Author
faltuk1
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Re: Trying to understand individual bond

Post by faltuk1 »

faltuk1 wrote:
Valuethinker wrote:
faltuk1 wrote:Here is the listing of AIG bond from Fidelity, showing yield to ask of 7.3%. Considering that AIG is owned by US govt, isn't it a good buy?

AMERICAN INTL GROUP INC MTN BE 5.45000% 05/18/2017FR
At a guess there is a risk of being called early.

It's a Medium Term Note, rather than a bond, which has its own legal meaning. Not sure if they are the same from an investor point of view.

Note AIG is controlled by US government but it has never been nationalized. That's an important distinction. If the US government walked away, it would lose its investment, but nothing more. No recourse on US Treasury.
Searching on google, it looks the difference between notes and bonds is that bonds is longer maturity and notes are up 10 year maturity. Other than that there seems to be no difference.

Also, based on the description on Fidelity, how do I know if it is a secured or unsecured note/bond?
Also, the fidelity site shows that this bond has call protection, so no risk of being called early.
duhmel1
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Re: Trying to understand individual bond

Post by duhmel1 »

faltuk1 wrote:
Also, the fidelity site shows that this bond has call protection, so no risk of being called early.
If you buy the bond at 87, what's the 'risk' of it being called early???? If it is called you make an enormous profit and get to move on.
The Wizard
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Re: Trying to understand individual bond

Post by The Wizard »

faltuk1 wrote:If the crooks on wall street can understand and make gazillion dollors, I am sure we can all figure out how to assess individual bonds.
Umm, the crooks make $$$ by STEALING it from investors by one shady trick or another, not by investing in securities...
Valuethinker
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Re: Trying to understand individual bond

Post by Valuethinker »

faltuk1 wrote:
Valuethinker wrote:
faltuk1 wrote:Here is the listing of AIG bond from Fidelity, showing yield to ask of 7.3%. Considering that AIG is owned by US govt, isn't it a good buy?

AMERICAN INTL GROUP INC MTN BE 5.45000% 05/18/2017FR
At a guess there is a risk of being called early.

It's a Medium Term Note, rather than a bond, which has its own legal meaning. Not sure if they are the same from an investor point of view.

Note AIG is controlled by US government but it has never been nationalized. That's an important distinction. If the US government walked away, it would lose its investment, but nothing more. No recourse on US Treasury.
Searching on google, it looks the difference between notes and bonds is that bonds is longer maturity and notes are up 10 year maturity. Other than that there seems to be no difference.

Also, based on the description on Fidelity, how do I know if it is a secured or unsecured note/bond?
Hi

That's the difference between a T Note and a T Bond (US Treasury).

An MTN is issued under Shelf Registration with the SEC, where a new prospectus is not required for issuance. Simplifies the paperwork. Not sure if it has any other implications (don't think so).

What you need to do is download the prospectus from the SEC website and have a look.

Remember the GM bondholders got 10 cents on the dollar.

This may well be cheap, but I suspect it is unsecured. You sit behind the US taxpayer and her $120bn of loans to AIG. It is not, therefore, 'risk free'.

It is anomalously cheap for a bond of that credit rating, I think but one would need to know why-- which leads to seeing if there's any published research you can get hold of, and/or there are any clauses that would give us pause: subordination (almost certain), some form of callability (you say no).

Got a friend with a Bloomberg? Bloomberg has literally pages and pages of data on each bond.
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