Inherited individual corporate bonds: hold to maturity?
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Inherited individual corporate bonds: hold to maturity?
My wife inherited an IRA account and an taxable individual account - both which contain individual corporate bonds (among other not-so-desirable investments). I had these bonds transferred over in-kind to our existing Vanguard accounts. My dilemma is whether to hold on to the existing bonds until maturity (some have attractive yields) while at the same time bear the credit and call risk that is associated with them; or secondly, sell the bonds and incur the transaction costs and possible mark-down for selling a security that is most likely somewhat illiquid. If I hold them, I would allocate that balance to my allocation of short-term inv grade corporate bonds.
The bonds are listed below along with their rating. I've never owned individual corporate bonds (I believe the effective form of diversification in this asset class is in a mutual fund) - so weighing the pros and cons of selling vs holding to maturity has been tricky. Thoughts on this decision?
IRA Account
- yield 4.25%, due 5/15/13, callable, S&P Rating: A-, market price 100.50
- yield 6.25%, due 11/01/11, callable, S&P Rating: A-,market price 106.15
- yield 7%, due 8/15/13, S&P Rating: BB+, market price 103.00
Taxable Account
- yield 4.2%, due 12/15/10, callable, S&P Rating: AA+,market price 101.25
- yield 7%, due 8/15/13, S&P Rating: BB+, market price 103.00 (same bond as the last one listed in the IRA)
I did not list the balances, but they are considerable enough to make this decision an important one.
Regards, Brian
The bonds are listed below along with their rating. I've never owned individual corporate bonds (I believe the effective form of diversification in this asset class is in a mutual fund) - so weighing the pros and cons of selling vs holding to maturity has been tricky. Thoughts on this decision?
IRA Account
- yield 4.25%, due 5/15/13, callable, S&P Rating: A-, market price 100.50
- yield 6.25%, due 11/01/11, callable, S&P Rating: A-,market price 106.15
- yield 7%, due 8/15/13, S&P Rating: BB+, market price 103.00
Taxable Account
- yield 4.2%, due 12/15/10, callable, S&P Rating: AA+,market price 101.25
- yield 7%, due 8/15/13, S&P Rating: BB+, market price 103.00 (same bond as the last one listed in the IRA)
I did not list the balances, but they are considerable enough to make this decision an important one.
Regards, Brian
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Re: Inherited individual corporate bonds: hold to maturity?
I'm not a bond expert, and it would be helpful to know the percentage of your total assets each is, but this is a fun exercise, so:
You might also consider holding the IRA 7% BB+ bond just to hedge.
The quoted market prices seem a little high to me, e.g., 6.25% (callable!) for 14 more months priced at 106.15 and 4.2% for four more months priced at 101.25.Compounding wrote: IRA Account
Hold - yield 4.25%, due 5/15/13, callable, S&P Rating: A-, market price 100.50
Hold - yield 6.25%, due 11/01/11, callable, S&P Rating: A-,market price 106.15
Sell - yield 7%, due 8/15/13, S&P Rating: BB+, market price 103.00
Taxable Account
Hold - yield 4.2%, due 12/15/10, callable, S&P Rating: AA+,market price 101.25
Sell - yield 7%, due 8/15/13, S&P Rating: BB+, market price 103.00 (same bond as the last one listed in the IRA)
You might also consider holding the IRA 7% BB+ bond just to hedge.
I just sold a single corporate bond in a similar situation, although the total value was a relatively small part of my portfolio.
I think the basic way to think about this is: If you had $x to invest today, would you buy these bonds? Say $x is the current value of the bonds.
If the answer is no, you'd invest $x differently, then you should probably look to sell the bonds.
The question then becomes -- how much to sell? At Vanguard, you can call the bond desk and get an estimate of sale price and cost. It does amaze me how much people are willing to pay for the bonds right now -- in my case, principal plus 3 of 9 remaining payments.
I think the basic way to think about this is: If you had $x to invest today, would you buy these bonds? Say $x is the current value of the bonds.
If the answer is no, you'd invest $x differently, then you should probably look to sell the bonds.
The question then becomes -- how much to sell? At Vanguard, you can call the bond desk and get an estimate of sale price and cost. It does amaze me how much people are willing to pay for the bonds right now -- in my case, principal plus 3 of 9 remaining payments.
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Thanks for the advice. Whether I sell them or not, the balance will be allocated to the corporate bond portion of my asset allocation - so it makes no sense to calculate the opportunity costs of a stock fund. With the Vanguard ST Corp fund yielding 3.47% - I am getting a major boost in yield by sticking with the individual bonds until maturity. Plus I am leary of the transaction costs of selling such bonds in the secondary market.
My only concern is whether the credit risk is worth it, as some of the bonds are on the cusp of non-investment grade. I can only assume these were picked for a reason by the advisor prior to me inheriting them - for whatever that's worth.
My only concern is whether the credit risk is worth it, as some of the bonds are on the cusp of non-investment grade. I can only assume these were picked for a reason by the advisor prior to me inheriting them - for whatever that's worth.
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As we don't know the names of the issuers, it's very hard to really advise you. I'm not a great fan of credit ratings: simply the best data we have but not reliable.Compounding wrote:Thanks for the advice. Whether I sell them or not, the balance will be allocated to the corporate bond portion of my asset allocation - so it makes no sense to calculate the opportunity costs of a stock fund. With the Vanguard ST Corp fund yielding 3.47% - I am getting a major boost in yield by sticking with the individual bonds until maturity. Plus I am leary of the transaction costs of selling such bonds in the secondary market.
My only concern is whether the credit risk is worth it, as some of the bonds are on the cusp of non-investment grade. I can only assume these were picked for a reason by the advisor prior to me inheriting them - for whatever that's worth.
Cusp of non investment grade could be quite scary. If they were Greek government bonds, I'd say sell .
Since there are significant dealing spreads associated with retail sales of these bonds (you usually don't get market price) I would be tempted to just hold them to maturity/ call. Then there is no cash cost of getting your money back.
However if it is more than 5-10% of your total portfolio, that's probably too big a risk, and I'd sell, unless I was fairly convinced the bond would pay out (if there is default, you will normally get something on the bonds, eventually-- however if they are Financial Services issuers, that's less likely-- Lehman Brothers I think the figure is c. 10 cents/ dollar, and (industrial issue) GM was similar-- both were rated investment grade, I think, within 36 months of default).
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- asset_chaos
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When I faced this issue about 5 years ago with a mix of corporate, muni, and mortgage bonds, I looked at the average maturity of the bond funds I use for my bond allocation. Individual bonds with maturities longer than the fund's I sold; bonds with maturities shorter than the fund's I kept. Basically I sold the bonds that increased my term risk profile and kept the shorter ones to avoid selling costs.
I make no claims that this was some kind of superior strategy, and I didn't keep track of how I did versus a stategy of holding all the inherited bonds. Basically I didn't want to worry about the risk of a less diversified bond portfolio, and that's how I delt with it.
I make no claims that this was some kind of superior strategy, and I didn't keep track of how I did versus a stategy of holding all the inherited bonds. Basically I didn't want to worry about the risk of a less diversified bond portfolio, and that's how I delt with it.
Regards, |
|
Guy
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Re: Inherited individual corporate bonds: hold to maturity?
Bob's not my name wrote:The quoted market prices seem a little high to me, e.g., 6.25% (callable!) for 14 more months priced at 106.15.
You can see recent trades on this bond at the Bond Desk. Although it was trading at just under 106.15 in July, recent trades are around 105, which is consistent with the current bid. The call terms aren't clear to my novice eye.209615BX0 Consolidated Nat Gas Co A- 6.250 11/01/2011 105.17 Bid/106.897 Ask
We found ourselves in a very similar situation. My wife inherited stocks and bonds from her father, and the portfolio included 5 "blue chip" company bonds. Walmart, Boeing, Seagrams, etc. We held on for a few years, but these were not as material to us as yours are to you. A few years later, the Seagrams bond dropped to around 60% of its original value. It turns out that Seagrams had sold a part of their business to Vivendi and the bonds went with Vivendi. Vivendi then went into financial difficulties. (I am pretty sure the details are correct, but it really doesn't affect the decision). Anyway, the bond recovered to a little over 90% and we sold all 5 bonds quickly.
In my opinion, the risk of an individual bond isn't worth it....unless you want to diversify with dozens and dozens of them. I wish we had sold immediately, and we were lucky to get a recovery in the Vivendi bond.
Best wishes.
In my opinion, the risk of an individual bond isn't worth it....unless you want to diversify with dozens and dozens of them. I wish we had sold immediately, and we were lucky to get a recovery in the Vivendi bond.
Best wishes.
Andy
- TimeRunner
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Re: Inherited individual corporate bonds: hold to maturity?
I woke up this old thread because it's the closest to a related question I have for which I did not find an answer here or Googling. If one holds individual corporate and/or muni bonds, what exactly happens when they mature. For example, $5,000 school district bond matures Dec 1, 2017. What does the brokerage statement look like for December 2017 and Jan 2018? I would guess you would have $5,000 added to your sweep account in Dec with some notation that the bond matured, and no trace of the bond on the January statement? (Context: Looking at Mom's trust accounts where former FA had purchased approx $5K chunks of various individual bonds. Thinking of just holding them to maturity, and wondering what happens when they mature.) TIA!
Edit: I guess I'm really asking if there's any action one needs to take at bond maturity time or if it's just automatic.
Edit: I guess I'm really asking if there's any action one needs to take at bond maturity time or if it's just automatic.
One cannot enlighten the unconscious. | "All I need are some tasty waves, a cool buzz, and I'm fine." -Jeff Spicoli
Re: Inherited individual corporate bonds: hold to maturity?
It's automatic. If you hold them with Vanguard, they will send you an email about 2-4 weeks prior to maturity to let you know it is scheduled to mature. The only question is what you want to do with the proceeds. They will, as you surmised, just show up in the settlement account, and it's up to the investor to do something with the money.TimeRunner wrote:I guess I'm really asking if there's any action one needs to take at bond maturity time or if it's just automatic.
Steve
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Re: Inherited individual corporate bonds: hold to maturity?
I posted a similar question regarding an inheritance that I manage on behalf of my kids. Consensus was to hold to maturity but it may be interesting to read the responses. viewtopic.php?f=1&t=214457
- TimeRunner
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Re: Inherited individual corporate bonds: hold to maturity?
Awesome, thank you both. May this thread help others too.
One cannot enlighten the unconscious. | "All I need are some tasty waves, a cool buzz, and I'm fine." -Jeff Spicoli