Should I sell Microsoft Bond

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hoops777
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Should I sell Microsoft Bond

Post by hoops777 » Mon Oct 15, 2018 1:03 pm

I have a Microsoft Bond,50,000 dollars yielding 3.15 that matures in 7 years.I t looks like if I sell it I will get back 49,000.If I sell I will buy a 2 year cd yielding almost the same.I have owned the bond for 3 years.Thoughts?
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Goal33
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Re: Should I sell Microsoft Bond

Post by Goal33 » Mon Oct 15, 2018 1:20 pm

I am confident that Microsoft will be able to pay your bond back in full at maturity. However, I personally probably wouldn't want to hold it.
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hoops777
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Re: Should I sell Microsoft Bond

Post by hoops777 » Mon Oct 15, 2018 2:38 pm

I am not concerned about Microsoft just the investment return of selling for 1000 less than I paid for it and reinvesting the money.Seven years is a long time and if interest rates keep rising it might be best to sell.I can buy a 2 yr cd paying 3 pct.
K.I.S.S........so easy to say so difficult to do.

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oldcomputerguy
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Re: Should I sell Microsoft Bond

Post by oldcomputerguy » Mon Oct 15, 2018 2:46 pm

(deleted, see replacement post below)
Last edited by oldcomputerguy on Mon Oct 15, 2018 3:03 pm, edited 1 time in total.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

hoops777
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Re: Should I sell Microsoft Bond

Post by hoops777 » Mon Oct 15, 2018 2:52 pm

Yes,that is the dilemma.
K.I.S.S........so easy to say so difficult to do.

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vineviz
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Re: Should I sell Microsoft Bond

Post by vineviz » Mon Oct 15, 2018 2:55 pm

hoops777 wrote:
Mon Oct 15, 2018 1:03 pm
I have a Microsoft Bond,50,000 dollars yielding 3.15 that matures in 7 years.I t looks like if I sell it I will get back 49,000.If I sell I will buy a 2 year cd yielding almost the same.I have owned the bond for 3 years.Thoughts?
I'm not sure which bond you have, but the MSFT bonds that mature in November 2025 (i.e. roughly 7 years from now) are actually yielding closer to 3.6% as of this afternoon.

The yield you quoted (3.15) is likely the initial coupon yield, but the number you care about is the current yield to maturity. If you hold that Microsoft bond to maturity, you will realize precisely that 3.6% return from now until then.

If you buy a 2-year CD yielding less than that not only are you accepting a lower return now but you are also taking on the risk that, in two years, you'll have to reinvest the proceeds at an even lower interest rate yet.

Bond markets, like stock markets, are very efficient at pricing assets. You can be confident that selling one security and buying another is unlikely to offer a significant improvement in risk-adjusted returns. I'd hold onto the Microsoft bond (in fact I've got one in my portfolio, albeit with a longer duration).
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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oldcomputerguy
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Re: Should I sell Microsoft Bond

Post by oldcomputerguy » Mon Oct 15, 2018 3:02 pm

hoops777 wrote:
Mon Oct 15, 2018 1:03 pm
I have a Microsoft Bond,50,000 dollars yielding 3.15 that matures in 7 years.I t looks like if I sell it I will get back 49,000.If I sell I will buy a 2 year cd yielding almost the same.I have owned the bond for 3 years.Thoughts?
The interest rate of the current bond shouldn't change just because prevailing interests rates rise, even though the price of the bond on the open market changes. If you hold the bond to maturity, you should get the original $50,000 back plus seven more years of interest at 3.15% per year. If you sell now and take a loss of 2% of your principal, and reinvest the bond in something paying "almost the same", what have you accomplished?
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

jdilla1107
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Re: Should I sell Microsoft Bond

Post by jdilla1107 » Mon Oct 15, 2018 3:07 pm

A 7 year bond that you have held for 3 years, is now a 4 year bond. Taking a 2% loss to trade a 4 year bond for a 2 year bond at the interest rate doesn't make any sense to me.

The interest rate market is just as hard to predict as any other market. Stay the course.

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EddieGee
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Re: Should I sell Microsoft Bond

Post by EddieGee » Mon Oct 15, 2018 3:14 pm

jdilla1107 wrote:
Mon Oct 15, 2018 3:07 pm
A 7 year bond that you have held for 3 years, is now a 4 year bond. Taking a 2% loss to trade a 4 year bond for a 2 year bond at the same interest rate doesn't make any sense to me.

The interest rate market is just as hard to predict as any other market. Stay the course.
I think OP means that the bond matures 7 years from now but I'm not sure.

If you are worried about interest rate risk it can make a lot of sense to take a 2% loss now to reduce the risk of a much greater loss if interest rates rise significantly. Besides, the 2% loss is now water over the dam. What matters is the threat of additional loss.

depressed
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Re: Should I sell Microsoft Bond

Post by depressed » Mon Oct 15, 2018 3:17 pm

hoops777 wrote:
Mon Oct 15, 2018 1:03 pm
I have a Microsoft Bond,50,000 dollars yielding 3.15 that matures in 7 years.I t looks like if I sell it I will get back 49,000.If I sell I will buy a 2 year cd yielding almost the same.I have owned the bond for 3 years.Thoughts?
Hello. I am new here. I can attempt to help with an approximation that ignores commissions and taxes, and considers only part of the reinvested interest.

1. Keep to maturity (seven years away): You'll get interest of $1,575/year for seven years plus $50,000 principal. Total(ignoring compounded interest): $61,025.

2. Sell now for $49,000; reinvest at 3% for two years; reinvest again for the final five years at, say, 4%:
  • At the end of those two years, you'll have about $51,940 (ignoring compound interest)
  • For the remaining five years, at 4% interest, that $51,940 will bring in about $2076/year. Total of $10,388 in interest over those five years (again, ignoring compounding)
  • At the end, you'll get back the $51,940 and you'll have the $10,388 interest, for a total of about $62,328.
So, if interest rates rise to 4% over the next two years, you stand to gain about 62,328 minus 61,025, or about $1,300. Of course, there's no guarantees that interest rates will rise. If you can get only 3% on the final five years, then you'll be out about $1,294 if I calculated right. I would probably leave it alone. I'd tell myself that I had a reason for choosing the ten-year plan, and I'd stick with it, concentrating on how to reinvest new money or other maturing assets. I don't think considering compounded interest changes the analysis much.

hoops777
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Re: Should I sell Microsoft Bond

Post by hoops777 » Mon Oct 15, 2018 4:44 pm

Thanks for the replies.It was a 10 yr bond.
K.I.S.S........so easy to say so difficult to do.

hoops777
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Re: Should I sell Microsoft Bond

Post by hoops777 » Mon Oct 15, 2018 8:22 pm

depressed wrote:
Mon Oct 15, 2018 3:17 pm
hoops777 wrote:
Mon Oct 15, 2018 1:03 pm
I have a Microsoft Bond,50,000 dollars yielding 3.15 that matures in 7 years.I t looks like if I sell it I will get back 49,000.If I sell I will buy a 2 year cd yielding almost the same.I have owned the bond for 3 years.Thoughts?
Hello. I am new here. I can attempt to help with an approximation that ignores commissions and taxes, and considers only part of the reinvested interest.

1. Keep to maturity (seven years away): You'll get interest of $1,575/year for seven years plus $50,000 principal. Total(ignoring compounded interest): $61,025.

2. Sell now for $49,000; reinvest at 3% for two years; reinvest again for the final five years at, say, 4%:
  • At the end of those two years, you'll have about $51,940 (ignoring compound interest)
  • For the remaining five years, at 4% interest, that $51,940 will bring in about $2076/year. Total of $10,388 in interest over those five years (again, ignoring compounding)
  • At the end, you'll get back the $51,940 and you'll have the $10,388 interest, for a total of about $62,328.
So, if interest rates rise to 4% over the next two years, you stand to gain about 62,328 minus 61,025, or about $1,300. Of course, there's no guarantees that interest rates will rise. If you can get only 3% on the final five years, then you'll be out about $1,294 if I calculated right. I would probably leave it alone. I'd tell myself that I had a reason for choosing the ten-year plan, and I'd stick with it, concentrating on how to reinvest new money or other maturing assets. I don't think considering compounded interest changes the analysis much.
Thanks for the math work,exactly what I was looking for.I came up with the same scenario and wanted verification.
K.I.S.S........so easy to say so difficult to do.

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whodidntante
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Re: Should I sell Microsoft Bond

Post by whodidntante » Mon Oct 15, 2018 8:26 pm

Shortening duration and the complete elimination of credit risk sounds like a good deal to me.

columbia
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Re: Should I sell Microsoft Bond

Post by columbia » Mon Oct 15, 2018 8:50 pm


Valuethinker
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Re: Should I sell Microsoft Bond

Post by Valuethinker » Tue Oct 16, 2018 7:43 am

hoops777 wrote:
Mon Oct 15, 2018 1:03 pm
I have a Microsoft Bond,50,000 dollars yielding 3.15 that matures in 7 years.I t looks like if I sell it I will get back 49,000.If I sell I will buy a 2 year cd yielding almost the same.I have owned the bond for 3 years.Thoughts?
When will you need the money? How big a percentage is it of your total portfolio?

7 years at a yield of 3.6% (Yield To Maturity rather than Coupon) seems a decent return. If interest rates rise it will seem less so. You are pretty much guaranteed that return over that time period and the credit risk is very low. And you are picking up say 60 basis points (0.6%) p.a. over the equivalent US Treasury Bond.

If you need the money sooner than 7 years or if you are very concerned about the impact of rising rates then you should sell. If you can afford to be phlegmatic about changes in the price over time, knowing you will get back $50k in 7 years time, then it looks like a reasonable investment.

Short rates don't usually stay at or above the yield of longer term bonds - that type of yield curve (reverse slope) is relatively rare (say less than 1/4 of the time). Eventually it will revert to short term rates being lower than longer term - but at what yield I don't think anyone can say.

There is credit risk with Microsoft but most of that yield difference over US Treasury bonds is about lower liquidity in size of trades for large size institutional investors, not higher credit risk.

Valuethinker
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Re: Should I sell Microsoft Bond

Post by Valuethinker » Tue Oct 16, 2018 7:44 am

columbia wrote:
Mon Oct 15, 2018 8:50 pm
RIP Paul Allen:
https://www.cnbc.com/2018/10/15/microso ... ge-65.html
Sad.

He seemed to do quite a bit of good with his money.

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jhfenton
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Re: Should I sell Microsoft Bond

Post by jhfenton » Tue Oct 16, 2018 8:15 am

hoops777 wrote:
Mon Oct 15, 2018 1:03 pm
I have a Microsoft Bond,50,000 dollars yielding 3.15 that matures in 7 years.I t looks like if I sell it I will get back 49,000.If I sell I will buy a 2 year cd yielding almost the same.I have owned the bond for 3 years.Thoughts?
Assuming it's the 11/03/25 MSFT 3.125% bond CUSIP 594918BJ2, you'd get $48,372.00 plus accrued interest if you sold it right now at Vanguard. That represents a YTM of 3.653%. It is a fairly liquid bond as corporates go, but the spread is still about 30 bp. (Buying the same $50,000 face would cost you $48,515.00 plus accrued interest. That $143.00 is the current spread.)

Hold it to maturity. Sell it and buy a CD. It doesn't matter too much in the grand scheme of things. I would have zero concern about MSFT defaulting in the next 7 years. They have a AAA credit rating for a reason (one of the very few).

Edited to fix my math: $163.00 to $143.00.
Last edited by jhfenton on Tue Oct 16, 2018 12:42 pm, edited 1 time in total.

LukeHeinz57
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Re: Should I sell Microsoft Bond

Post by LukeHeinz57 » Tue Oct 16, 2018 8:51 am

You've gotten good advice and explanations as to why you should hold this investment to maturity. I concur with the posters saying you aren't going to do better by selling and buying a CD. Unless it is due to you getting lucky with interest rate increases. But then again you could just as easily get lucky by staying in your current investment and there being interest rate decreases. It's all priced in. The frictional cost of selling (jhfenton referred to the spread above) would cause me to hold all else being equal.
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tarmangani
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Re: Should I sell Microsoft Bond

Post by tarmangani » Tue Oct 16, 2018 9:51 am

Folks should link to this thread whenever someone complains that bond funds lose value but individual bonds don't when facing rising interest rates.

hoops777
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Re: Should I sell Microsoft Bond

Post by hoops777 » Tue Oct 16, 2018 11:15 am

I guess I will just keep it.
This will guarantee that 5 year CDs will be over 5 pct in a couple years for everyone :D
K.I.S.S........so easy to say so difficult to do.

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