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assessing risk of involuntary bond redemptions

Posted: Wed Feb 12, 2020 9:08 am
by capran
How does one assess the probability of getting a late in the year involuntary bond redemptions? In December I received notice that US West Comm was redeeming a bond in early January. I understand why they would, given that corporations are flush with cash due to the tax breaks, and they can borrow money for substantially less than the bond they were paying (7.125%). The capital gains was after January 1, so I can plan for that by taking a little less income this year. But now worried that could happen with other bonds, at the last days of the year, which could cause me to exceed planned income limits. Are there any requirements for corporations to redeem early in a year, or could they just as easily send me notice in late December? I suppose I can wait until the last minute to determine what amount of my IRA to take and convert to a Roth, but prefer to take it earlier. any thoughts?

Re: assessing risk of involuntary bond redemptions

Posted: Wed Feb 12, 2020 9:24 am
by Stinky
capran wrote:
Wed Feb 12, 2020 9:08 am
How does one assess the probability of getting a late in the year involuntary bond redemptions? In December I received notice that US West Comm was redeeming a bond in early January. I understand why they would, given that corporations are flush with cash due to the tax breaks, and they can borrow money for substantially less than the bond they were paying (7.125%). The capital gains was after January 1, so I can plan for that by taking a little less income this year. But now worried that could happen with other bonds, at the last days of the year, which could cause me to exceed planned income limits. Are there any requirements for corporations to redeem early in a year, or could they just as easily send me notice in late December? I suppose I can wait until the last minute to determine what amount of my IRA to take and convert to a Roth, but prefer to take it earlier. any thoughts?
I believe that most bond issues can be called anytime after the call date. The call premiums (if any) and precise terms would be laid out in the bond indenture.

If I were holding individual bonds, I would assume that the bond issuer would make financially rational choices, and would call bonds that have above-current-market interest rates when they can. Then you can be pleasantly surprised when a few issuers keep the bond in place past the call date.

Re: assessing risk of involuntary bond redemptions

Posted: Fri Feb 14, 2020 12:44 pm
by capran
I don't have that info as I'm traveling, but will check what it was. It wasn't a huge bond, but it was paying 2400 a year, and when it was redeemed it incurred about 2900 in capital gains, which is what I'm more concerned about with the remaining bonds potential for being redeemed. I thought it had some ridiculously long maturity date (like 2035), but sounds like there should be another item called "the call date".

Re: assessing risk of involuntary bond redemptions

Posted: Fri Feb 14, 2020 12:57 pm
by 123
capran wrote:
Fri Feb 14, 2020 12:44 pm
...I thought it had some ridiculously long maturity date (like 2035), but sounds like there should be another item called "the call date".
If you bought the bond through a financial adviser and he didn't make it abundant clear about the risks of "call date" you may want to look elsewhere for investment guidance. Another thing to consider is whether you paid a premium (more than face value) for the bond. If you paid a premium for an expected greater return on the bond and it gets called by the issuer you have lost out in that regard as well.

Re: assessing risk of involuntary bond redemptions

Posted: Fri Feb 14, 2020 6:35 pm
by Uncorrelated
Are we talking callable bonds? I don't remember in which research paper I read this, but afaik callable bonds have lower expected returns than uncallable bonds. Rather than trying to asses the risk of callable bonds, I think it would be a better idea to sell those bonds ASAP and just purchase a bond ETF, which usually contain an extremely low amount of callable bonds.

Re: assessing risk of involuntary bond redemptions

Posted: Fri Feb 14, 2020 9:06 pm
by grabiner
Uncorrelated wrote:
Fri Feb 14, 2020 6:35 pm
Are we talking callable bonds? I don't remember in which research paper I read this, but afaik callable bonds have lower expected returns than uncallable bonds. Rather than trying to asses the risk of callable bonds, I think it would be a better idea to sell those bonds ASAP and just purchase a bond ETF, which usually contain an extremely low amount of callable bonds.
Bond ETFs may have a lot of callable bonds, depending on what market segment they index. Consider, for example, the muni bond index VTEB. Vanguard reports an average stated maturity of 13.5 years for this ETF, but a duration (a measure of interest-rate risk) of 5.3 years. The bond market prices the bonds which are likely to be called as if they matured near the call date, rather than at stated maturity.

Corporate bonds are less likely to be called. VCIT (Intermediate-Term Corporate Index) has an average maturity of 7.1 years and a duration of 6.2 years; this is normal for non-callable bonds, as some of the payments come before maturity. (VCLT, Long-Term Corporate Index, does have a duration significantly less than its maturity, but that is primarily the result of the large part of the bond values from coupon payments, rather than callable bonds.)